MODERN   CURRENCY   REFORMS 


THE  MACMILLAN  COMPANY 

NEW  YORK    •    BOSTON  •   CHICAGO  •   DALLAS 
ATLANTA   •    SAN   FRANCISCO 

MACMILLAN  &  CO.,  LIMITED 

LONDON  •    BOMBAY  •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  LTD. 

TORONTO 


MODERN   CURRENCY 
REFORMS 


A   HISTORY   AND    DISCUSSION    OF    RECENT 

CURRENCY     REFORMS     IN     INDIA, 

PORTO  RICO,  PHILIPPINE  ISLANDS, 

STRAITS     SETTLEMENTS 

AND   MEXICO 


BY 


EDWIN   WALTER   KEMMERER,    PH.D. 

n 

PROFESSOR  OF  ECONOMICS  AND  FINANCE  IN  PRINCETON  UNIVERSITY, 
FORMERLY   FINANCIAL    ADVISER   TO    THE    UNITED    STATES 
GOVERNMENT    IN    THE    PHILIPPINE    ISLANDS    WITH 
PARTICULAR  REFERENCE  TO  THE  ESTABLISH- 
MENT OF  A  GOLD-STANDARD  CURRENCY 


Itfefo  gorfc 

THE   MACMILLAN   COMPANY 
1916 

All  rights  reserved 


COPYRIGHT,  1916, 
BY  THE  MACMILLAN  COMPANY. 

Set  up  and  electrotyped.    Published  December,  1916. 


J.  8.  Gushing  Co.  —  Berwick  &  Smith  Co. 
Norwood,  Mass.,  U.S.A. 


TO 

MY  FORMER  TEACHER  AND  COLLEAGUE 

JEREMIAH   WHIPPLE  JENKS 

WHO   FIRST   DIRECTED   MY   INTEREST   TO   THE   FIELD 
OF  MODERN  CURRENCY  REFORMS 


34G449 


PREFACE 

THE  student  of  economics  often  expresses  regret  that 
his  science  does  not  submit  itself  to  the  laboratory  method 
of  investigation  which  has  proven  so  fruitful  in  the  natural 
sciences.  His  phenomena  are  too  complex  and  too  closely 
related  to  human  welfare  to  permit  of  their  reduction  to 
simple  elements  and  of  the  bringing  together  of  these  ele- 
ments into  different  combinations  so  as  to  study  the  vary- 
ing results.  The  facts  of  economic  science  must  be  studied 
in  the  complex  forms  in  which  they  develop,  and  their 
development  is  usually  slow.  Such  is  particularly  the  case 
in  monetary  science,  and  one  of  the  results  is  that  this 
science  is  shot  through  and  through  with  controversial 
problems. 

The  nearest  approach  the  economist  has  to  the  labora- 
tory method  in  studying  monetary  problems  is  through  the 
study  of  modern  currency  reforms.  Here  the  phenomena 
are  deliberately  manipulated;  entire  currency  systems  of 
long  years  standing,  upon  which  the  business  and  the 
credit  of  millions  of  people  have  been  based,  systems  in 
which  prejudice  and  custom  have  wrought  their  work,  are 
entirely  transformed  in  a  short  period  —  a  few  years  or 
perhaps  only  a  few  months.  A  silver  standard,  as  in 
Mexico,  or  a  fiduciary  standard,  as  in  Porto  Rico,  is  trans- 
formed into  a  gold  standard ;  a  fiduciary  standard,  as  in 
the  Philippine  Islands,  is  transformed  into  a  gold-exchange 
standard.  The  unit  of  value  in  which  prices,  wages,  and 
taxes  have  been  expressed,  and  debts  contracted,  is  slowly 
raised  by  a  deliberately  planned  contraction  in  the  relative 


Vlll  PREFACE 

money  supply,  as  in  India;  is  quickly  raised  by  relative 
contraction,  as  in  the  Straits  Settlements ;  is  carried  up  by 
a  rising  silver  market,  as  in  Mexico ;  or  is  forced  to  give 
way  suddenly  to  an  absolutely  new  unit  of  value,  as  in 
Porto  Rico.  These  changes  are  carried  through  in  a  short 
time,  and  their  effects  are  writ  large  —  effects  in  prices, 
taxes,  wages,  in  debts  contracted  in  the  old  currency  and 
henceforth  payable  in  the  new,  in  foreign  trade,  and  in 
public  credit. 

It  is  hoped  that  the  discussion  of  these  currency  reforms 
which  follows  will  throw  light  on  fundamental  monetary 
principles,  and  will  afford  lessons  of  value,  both  by  exam- 
ple and  by  warning,  to  the  countries  of  Asia  and  Latin 
America,  which  are  expected  soon  to  undertake  thorough- 
going reforms  of  their  currency  systems. 

Each  of  the  five  countries  whose  currency  reforms  are 
studied  had  a  different  problem,  and  the  experience  of  each 
offers  its  own  lessons;  it  is  none  the  less  true,  however, 
that  in  a  number  of  respects  the  problems  and  experiences 
were  similar.  Inasmuch  as  some  readers  will  not  be  inter- 
ested in  all  five  of  the  essays,  it  has  seemed  best  to  make 
each  a  unit  in  itself.  To  this  end,  in  the  interest  of  clarity, 
some  repetition  has  been  necessary.  It  is  hoped,  however, 
that,  through  the  rather  liberal  use  of  cross  references,  the 
amount  has  been  kept  down  to  the  minimum  consistent 
with  clearness. 

The  material  of  this  book  has  been  in  process  of  collec- 
tion and  preparation  by  the  author  for  a  period  covering 
thirteen  years,  nearly  three  of  which  he  spent  as  a  govern- 
ment official  in  countries  whose  currency  reforms  are  de- 
scribed. In  that  time  he  has  received  assistance  from  many 
persons  to  whom  the  limits  of  a  brief  preface  prevent  indi- 
vidual acknowledgment,  notably  government  officials,  bank- 
ers, and  business  men  of  Manila,  San  Juan  (Porto  Rico), 
Singapore,  and  the  City  of  Mexico.  It  is  a  pleasure  to 
acknowledge  specifically  and  with  gratitude  valuable  assist- 
ance from  Mr.  Edmund  Enright,  Assistant  Secretary  of 


PREFACE  IX 

the  Interior,  Porto  Rico ;  Frank  A.  Branagan,  formerly 
Treasurer  of  the  Philippine  Islands ;  Henry  C.  Ide,  for- 
merly Secretary  of  Finance  and  Justice  of  the  Philippine 
Islands  ;  J.  O.  Anthonisz,  formerly  Treasurer  of  the  Straits 
Settlements,  whose  recent  book  on  the  Straits  Settlements 
currency  reform  came  to  the  author's  attention  after  the 
present  essay  on  that  subject  was  in  the  hands  of  the 
printer ;  John  Anderson,  formerly  Governor  of  the  Straits 
Settlements  ;  Jeremiah  W.  Jenks,  Professor  of  Government 
in  New  York  University ;  James  W.  Beardsley,  Chief  Engi- 
neer, Porto  Rican  Irrigation  Service ;  Jos£  Limantour,  for- 
merly Finance  Minister  of  Mexico;  Clarence  R.  Edwards, 
formerly  Chief  of  the  Bureau  of  Insular  Affairs,  War 
Department;  and  Frank  R.  Maclntyre,  at  present  Chief 
of  the  Bureau  of  Insular  Affairs.  Valuable  assistance  in 
the  reading  of  manuscript  was  rendered  by  my  colleagues 
in  the  Department  of  Economics  and  Social  Institutions 
in  Princeton  University,  David  A.  McCabe,  Walter  M. 
Adriance,  and  Arthur  N.  Young.  Last  but  not  least  I 
wish  to  express  my  gratitude  to  my  former  student  and 
present  colleague,  Neil  Carothers,  for  most  helpful  and 
painstaking  assistance  in  the  reading  of  proof. 

PRINCETON  UNIVERSITY, 
October  19,  1916. 


CONTENTS 

PART  I 
THE  INDIAN  CURRENCY  REFORM 

CHAPTER  I 

PAGES 

INDIAN  MONETARY  HISTORY  PRIOR  TO  1892          .        .        .        .         3-10 

Character  of  treatment,  3-4.  —  Coinage  history  prior  to 
1892  :  Origin  of  "government  rupee,"  4-6.  Efforts  to  intro- 
duce gold  into  circulation,  6-7.  Agitation  for  currency  re- 
form, 7-8.  —  Paper  currency  in  India  to  1892,  8-10. 

CHAPTER  H 

HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT  .        .        .        11-34 

Events  leading  to  appointment  of  Herschell  Committee, 
11-13.  —  Constitution  and  work  of  Committee,  and  charac- 
ter of  its  report,  13-14.  —  Financial  burdens  and  inconven- 
iences imposed  upon  the  Indian  Government  by  decline  in  the 
gold  price  of  silver,  14-17.  —  Depreciation  of  silver  or  appre- 
ciation of  gold?  17-22.  —  Evil  effects  of  the  fall  of  exchange 
through  influence  on  Indian  commerce :  General  statement, 
and  figures  showing  proportions  of  India's  foreign  trade  with 
gold  standard  and  with  silver  standard  countries,  respectively, 
22-24.  Declining  exchange  and  India's  export  trade,  24-28. 
Temporary  oscillations  in  exchange,  28-29.  —  Hardships 
caused  to  Europeans  in  India  by  the  fall  in  exchange,  29-30. 

—  Obstacles  to  the  increase  of  government  revenues,  31-32. 

—  Herschell  Committee  accepts  with  some  modifications  pro- 
posals of  Indian  Government,  32-33.  —  Herschell  Commit- 
tee's recommendations  adopted,  33-34. 

CHAPTER  III 
RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE      .        .        35-71 

Indian  mints  closed  to  the  free  coinage  of  silver,  35-37.  — 
Fall  in  price  of  silver,  38-39.  —  Temporary  rise  in  exchange 


Xll  CONTENTS 

PAGES 

and  suspension  of  sale  of  council  bills,  39-48.  —  "Starving 
the  circulation,"  1893-1898,  48-55.  —  To  what  extent  did  the 
rupee  appreciate  between  1893  and  1898?  —  Relation  be- 
tween exchange  rates  and  the  price  level,  62-66.  —  Discount 
rates,  1893-1898,  66-69.  —  Absolute  or  merely  relative  con- 
traction of  currency,  1893-1898?  70-71. 

CHAPTER  IV 

THE  FOWLER  COMMITTEE'S  INVESTIGATION  AND  REPORT  .        .        72-94 

Indian  Government's  proposals  for  stabilizing  exchange, 
72-73.  —  The  Fowler  Committee,  73-74.  —  Proposals  for 
bimetallism,  74-75.  —  Proposals  to  return  to  silver  standard, 
76-77.  —  Proposals  for  a  gold  standard  without  a  gold  cur- 
rency :  The  Probyn  plan,  77-79.  The  Lindsay  plan,  79- 
92.  —  The  Indian  Government's  proposals,  92-93.  —  Fowler 
Committee's  attitude  concerning  gold  coin  and  a  gold  reserve, 
93-94.  —  A  i6d.  gold  par  recommended,  94. 

CHAPTER  V 

INDIAN  CURRENCY  FROM  1899  TO  1907 95-112 

Prosperity  of  India  and  increasing  demand  for  rupees,  95- 
99.  —  The  new  supply  of  rupees  and  the  mechanism  by  which 
its  gold  parity  was  maintained  :  Issue  of  currency  notes  in 
India  against  sovereigns  and  silver  bullion  deposited  in  Lon- 
don, 100-104.  —  The  Gold  Standard  Reserve,  104-108.  — 
The  circulation  of  gold  coin  in  India,  108-112. 

CHAPTER  VI 

CRISIS  OF  1907-1908 113-123 

Causes  of  crisis,  113-115.  —  How  did  the  Government  meet 
the  emergency?  Sale  of  council  bills  reduced,  115-116. 
Policy  of  paying  out  gold  freely  abandoned,  1 16-1 17.  Sale  of 
telegraphic  transfers  on  London  instituted  by  Government, 
117-118.  —  Influence  of  crisis  upon  Government's  currency 
reserves,  1 18-1 20.  —  Criticism  of  Government'spolicyin  crisis, 
120-123. 

CHAPTER  VII 
INDIAN  CURRENCY  SINCE  CRISIS  OF  1907-1908  ....    124-147 

Reserve  funds  too  small,  125-126.  —  Large  accumulation 
of  rupees  accompanied  by  temporary  suspension  of  coinage, 


CONTENTS  xiii 

PAGES 

126-127.  —  Proper  size  of  Gold  Standard  Reserve,  127. — 
Location  of  Gold  Standard  Reserve,  127-129.  —  Composition 
of  Gold  Standard  Reserve,  129-133.  —  Convertibility  of 
rupees  into  gold  on  demand,  134-135.  —  The  paper  currency 
and  the  Paper  Currency  Reserve  since  the  crisis  of  1907-1008, 
135-138.  —  Gold  circulation  and  proposals  for  coining  gold  in 
India,  138-145.  —  Indian  currency  since  the  outbreak  of  the 
European  War,  146-147. 

APPENDIX  A 
A  SELECTED  BIBLIOGRAPHY  ON  INDIAN  CURRENCY    .       .        .    140-152 

PART   II 

THE  PORTO  RICAN  CURRENCY  REFORM  OF 

1899-1900 

CHAPTER  I 

CURRENCY  HISTORY  OF  PORTO  Rico  PRIOR  TO  THE  AMERICAN 

OCCUPATION 155-170 

General  character  of  Porto  Rican  currency  reform,  155.  — 
Monetary  history  of  Porto  Rico  from  1879  to  the  reform  of 
1895, 155-159.  —  The  currency  reform  of  1895  :  A  distinctive 
Porto  Rican  coinage  introduced,  161-165.  Porto  Rican 
bank  notes,  165.  How  the  new  currency  system  worked, 
166-169.  —  Spanish- American  War  and  the  Porto  Rican 
currency,  169-170. 

CHAPTER  II 

CURRENCY  REGULATIONS  UNDER  UNITED  STATES  MILITARY  GOV- 
ERNMENT            171-177 

Confusion  caused  by  various  rates  of  exchange  between 
Porto  Rican  and  United  States  currency,  171-174.  —  Govern- 
ment declares  an  official  rate  of  60  cents  to  the  peso,  174-176. 
—  Discrimination  against  American  national  bank  notes, 
176-177. 

CHAPTER  III 

FORMULATION  OF  A  PERMANENT  GOLD  STANDARD  PLAN    .        .     178-202 

Question  of  an  equitable  rate  of  conversion :  Interests  of 
holders  of  Porto  Rican  currency,  179-180.  Interests  of 
debtors  and  creditors,  180-185.  —  Advocates  of  a  high  rate  of 
conversion,  185-187.  —  Advocates  of  a  low  rate  of  conversion, 


xiv  CONTENTS 

PAGES 

187-191.  —  Sixty-cent  rate  adopted,  191-193.  —  How  should 
the  transition  to  the  new  currency  basis  be  effected?  193-199. 
—  The  Porto  Rican  currency  question  in  the  United  States 
Congress,  199-202. 

CHAPTER  IV 

PUTTING  THE  UNITED  STATES  CURRENCY  SYSTEM  INTO  OPERATION 

IN  PORTO  Rico 203-209 

Work  of  substituting  United  States  money  for  Porto  Rican 
money  conducted  by  special  agents  of  the  United  States 
Treasury,  203-205.  —  Kinds  and  denominations  of  United 
States  money  paid  out,  205-207.  —  Inadequate  number  of 
exchange  offices,  207-209. 

CHAPTER  V 

SOME   ECONOMIC  RESULTS  OF  THE   PORTO   RICAN   CURRENCY 

REFORM 210-224 

Influence  on  debts,  210.  —  Influence  on  foreign  trade,  210- 
212.  —  Influence  on  domestic  wholesale  prices,  212-213. — 
Influence  on  retail  prices,  213-219. — Influence  on  house 
rents,  219-220.  —  Influence  on  wages,  220-223.  —  Were  the 
price  and  wage  changes  permanent?  223-224. 

CHAPTER  VI 

COULD  THE  PLAN  FOR  CONVERTING  PORTO  RICAN  CURRENCY  INTO 

UNITED  STATES  CURRENCY  HAVE  BEEN  IMPROVED?     .        .     225-233 

The  rate  of  canje,  225-228.  —  Suggested  improvements  in 
reform  plan,  228-233. 

APPENDIX  A 

PORTO  RICAN  EXCHANGE  RATES  ON  NEW  YORK  CITY,  AND  THE 
EXCHANGE  AND  BULLION  VALUES  OF  THE  MEXICAN  PESO  m 
TERMS  OF  UNITED  STATES  CURRENCY,  MONTHLY,  1890-1905  235-236 

APPENDIX  B 

EXCHANGE  AND   BULLION  VALUES  OF   PORTO  RICAN  PESO  IN 

TERMS  OF  UNITED  STATES  CURRENCY,  MONTHLY,  1896-1900    237-238 

APPENDIX  C 
BIBLIOGRAPHY  ON  PORTO  RICAN  CURRENCY  REFORM        .        .    239-241 


CONTENTS 

PART  III 
THE  PHILIPPINE   CURRENCY  REFORM 

CHAPTER  I 

MONETARY  CONDITIONS  PRIOR  TO  THE  AMERICAN  OCCUPATION 
Varied  monetary  experience  prior  to  1877,  245-247.  — 
Origin  of  fiduciary  standard  in  Philippines,  247-249.  —  Kinds 
of  currency  in  circulation  at  time  of  American  occupation, 
249-250.  —  Explanation  of  Philippine  fiduciary  standard  for 
period  1877  to  1898,  250-253. 

CHAPTER  II 

THE  CURRENCY  PROBLEM  OF  THE  MILITARY  GOVERNMENT 

Character  of  the  problem,  254-256.  —  Proposal  that  Gov- 
ernment use  United  States  currency  exclusively,  for  its  fiscal 
operations,  256-259.  —  Proposal  that  Government  use  local 
currency  exclusively,  for  its  fiscal  operations,  259-262.  — 
Proposal  that  Government  use  both  currencies  for  its  fiscal 
operations  adopted,  263-266.  —  Efforts  of  Government  to 
maintain  a  two  to  one  ratio,  267-276. 


PAGl 

245-25 


254-27' 


CHAPTER  III 

DIFFICULTIES  WITH  A  DEPRECIATING  SILVER  STANDARD    .        .    277-299 

Quasi  bimetallism,  227-281.  —  Silver  standard  and  the 
Government's  finances:  General  statement,  281.  Financial 
losses  and  uncertainties  in  budget,  282-288.  Accounting 
difficulties,  288-290.  —  Difficulties  in  connection  with  foreign 
trade :  Extent  of  trade  with  countries  on  the  gold  standard 
and  with  countries  on  the  silver  standard,  290-292.  Ex- 
change fluctuations  and  foreign  trade,  292-296.  Forward 
exchange  contracts,  296-298.  —  Attitude  of  different  classes 
toward  proposals  for  a  gold  standard,  298-299. 

CHAPTER  IV 
PROPOSALS  FOR  PERMANENT  CURRENCY  REFORM       .        .        .    300-313 

Proposal  for  a  silver  standard  with  a  new  coinage,  300- 
301.  —  Proposal  to  extend  United  States  currency  system  to 


XVI 


CONTENTS 


Philippines,  301-306.  —  Proposal  &r  a  distinctive  Philippine 
coinage  on  a  gold  basis:  General  statement,  306.  Early 
formulation  of  plan,  307-308.  — The  Philippine  currency 
problem  in  the  United  States  Congress,  308-313. 


CHAPTER  V 

THE  FUNDAMENTAL  LAWS  OF  THE  PHILIPPINE  CURRENCY  REFORM    314-323 

The  Philippine  Coinage  Act,  314-317. —The  Philippine 
Gold  Standard  Act :  Main  provisions  of  Act,  3i7~3I9-  Tne 
principle  of  the  gold-exchange  standard  explained  in  its  appli- 
cation to  the  Philippines,  319-322.  Other  provisions  of  Act, 
322-323- 

CHAPTER  Vt 


WITHDRAWAL  OF  LOCAL  CURRENCY  FROM  CIRCULATION     . 

Nature  of  problem,  324.  —  Contention  that  old  currency 
should  be  redeemed  at  par  in  the  new,  325-327.  —  Unfavor- 
able public  reception  of  the  new  currency,  327-333.  —  Drastic 
measures  to  force  local  currency  out  of  circulation :  Need  of 
drastic  measures,  332-333.  Auxiliary  measures,  333~336- 
Prohibitive  taxes  levied  on  use  of  local  currency,  336-341. 
Results,  341-344.  —  Effect  of  Philippine  currency  reform  on 
prices,  344-345.  —  Withdrawal  of  local  currency  from  circula- 
tion practically  completed  by  the  spring  of  1905,  345-346. 


324-346 


CHAPTER   VII 

DANGER  TO  THE  NEW  CURRENCY  FROM  THE  RISE  IN  THE  PRICE  OF 

SILVER 347~358 

Phenomenal  rise  in  price  of  silver  in  1905-1906,  and  problem 
it  presented  to  Philippine  Government,  347-349.  —  Deter- 
mination of  melting  and  shipping  points  of  Philippine  coins, 
350-353.  —  Measures  taken  by  Government  to  prevent  new 
Philippine  coins  from  being  melted  or  .exported,  354-356.  — 
Substitution  of  gold  for  silver  as  part  of  certificate  reserve, 
356-358. 

CHAPTER  VHI 

THE  RECOINAOE 359-364 

The  enabling  Act  of  Congress,  350-360.  —  Recoinage 
measures  adopted  by  Philippine  Government  76c 


CONTENTS 


XVll 


The  amount  recoined,  361-362.  —  Putting  the  new  coins  into 
circulation,  362-363.  —  Domestic  drafts  sold  by  Government, 
363-364. 

CHAPTER  DC 
THE  GOLD  STANDARD  FUND  SINCE  THE  RECOINAGE  OF  1906-1909    365-382 

Seigniorage  profits  realized  on  recoinage,  365-367.  —  Size 
of  Gold  Standard  Fund,  367-368.  —  The  investment  of  part 
of  Gold  Standard  Fund,  369-375.  —  Objections  to  depositing 
part  of  Fund  in  local  banks,  375-377.  —  Objections  to  loan- 
ing part  of  Fund,  377-379.  —  Suggested  changes  in  Gold 
Standard  Fund,  379-382. 


APPENDIX  A 

UNWILLINGNESS  OF  THE  MANILA  BANKS  TO  RECEIVE  UNITED 
STATES  CURRENCY  DEPOSITS  FROM  THE  PUBLIC 


383-385 


APPENDIX  B 
BIBLIOGRAPHY  ON  PHILIPPINE  CURRENCY  REFORM 


.    386-388 


PART  IV 
THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 


CHAPTER  I 

THE  STRAITS  SETTLEMENTS  CURRENCY  PRIOR  TO  THE  REFORM  OF 

1903 

Early  history  of  Straits  Settlements  currency,  391-392.  — 
The  circulation  at  beginning  of  the  year  1903,  392-393.  — 
Dissatisfaction  with  silver  standard,  393-394.  —  Currency 
reform  plan  of  Singapore  Chamber  of  Commerce,  394-396.  — 
The  Straits  Settlements  Currency  Committee,  396-397.  — 
Instability  of  Singapore  exchange,  1891  to  1901,  398.  — 
Sterling  obligations  of  Government,  398-399.  —  Foreign 
trade  of  Straits  Settlements,  1891  to  1901,  with  gold  standard 
countries  and  with  silver  standard  countries,  399-401. — 
Other  disadvantages  of  silver  standard,  401.  —  Various  plans 
proposed  for  introducing  gold  standard,  401. 


391-401 


XV111 


CONTENTS 


CHAPTER  II 

A  CURRENCY  REFORM  PLAN  ADOPTED 

Main  features  of  plan,  402-404.  —  Heavy  shipments  of 
Mexican  and  British  dollars  to  the  Straits  Settlements,  404. 
—  The  new  dollar  placed  in  circulation,  404-405.  —  Old 
dollar  demonetized,  405-406.  —  Recoinage  completed,  407. 


PAGES 
4O2-4O7 


CHAPTER  III 
RAISING  THE  DOLLAR  TO  TWENTY-EIGHT  PENCE 

The  course  of  appreciation  in  the  gold  value  of  the  Straits 
Settlements  dollar,  408-410.  —  Period  of  appreciation  one  of 
excessive  speculation  in  exchange  in  Singapore,  410-416.  — 
Gold  par  of  dollar  fixed  at  2&d.,  416-419.  —  Principle  of  gold- 
exchange  standard  rejected,  419-420.  —  Reasons  given  for  its 
rejection,  420.  —  Inadequacy  of  these  reasons,  420-423. 


408-423 


CHAPTER  IV 

RESULTS  OF  RAISING  DOLLAR  TO  TWENTY-EIGHT  PENCE  . 

Influence  on  domestic  trade,  424-426.  —  Influence  on 
foreign  trade :  Transit  trade,  426-428.  Influence  on  export 
trade  in  local  products  and  import  trade  in  goods  for  home 
consumption,  428-433.  —  Influence  on  equities  between 
debtor  and  creditor,  433-439.  —  Advisability  of  a  recoinage 
in  1905  and  of  a  23.  par,  439-444. 


424-444 


CHAPTER  V 

RISE  IN  THE  PRICE  OF  SILVER  AND  MEASURES  TAKEN  TO  PROTECT 

THE  CURRENCY 

The  problem  which  the  rise  in  the  price  of  silver  in  1905- 
1906  presented  to  the  Government,  445.  —  Secondary  meas- 
ures for  protecting  currency,  446-447.  —  Recoinage  :  Plan 
adopted,  447-448.  Results,  449. 


445-449 


CHAPTER  VI 

ADOPTION  OF  GOLD-EXCHANGE  STANDARD          .... 
General  statement,  450.  —  The  Straits  Settlements  cur- 
rency notes  out  of  the  functioning  of  which  the  gold-exchange 


450-459 


CONTENTS  XIX 

PAGES 

standard  developed,  450-452.  —  Decline  in  dollar  value  of 
Note  Guarantee  Fund  when  gold  value  of  dollar  was  raised, 
452-453.  —  Beginnings  of  gold-exchange  standard,  453-458. 
—  How  the  gold-exchange  standard  in  the  Straits  Settlements 
has  worked,  458-459. 

APPENDIX  A 

RATES  OF  STERLING  EXCHANGE  IN  SINGAPORE  COMPARED  WITH 
RATES  IN  HONGKONG  AND  WITH  THE  BULLION  VALUES  OF  THE 
BRITISH  AND  THE  STRAITS  SETTLEMENTS  DOLLAR,  1902-1906  460-461 


APPENDIX  B 

BIBLIOGRAPHY  OF  STRAITS  SETTLEMENTS  CURRENCY  REFORM, 
GIVING  PRINCIPAL  REFERENCES  CITED        .        .        . 


462-463 


PART  V 
THE  MEXICAN  CURRENCY  REFORM,   1903-1008 


CHAPTER  I 

INTRODUCTION "...    467-470 

Mexico's  historical  position  as  a  silver  producer,  467.  — 
Prominent  place  held  by  Mexican  dollar  and  its  lineal  pred- 
ecessors in  the  world's  monetary  history,  467-469.  —  Mexico 
in  an  exceptional  position  because  of  its  large  silver  mining 
industry,  469-470. 

CHAPTER  II 

ECONOMIC  CONDITIONS  IN  MEXICO  IMMEDIATELY  PRECEDING  THE 

CURRENCY  REFORM  OF  1903-1908 471-494 

Currency  system  of  Mexico  prior  to  1903,  471-473.  —  The 
silver  standard  and  the  Mexican  Government's  finances,  473- 
477.  —  The  silver  standard  and  Mexico's  foreign  trade: 
Extent  of  variations  in  gold  value  of  silver  in  Mexico,  1893- 
1902,  477-479. — Influence  of  rising  exchange  upon  the  re- 
turns received  for  national  products,  479-483.  —  The  silver 
standard  and  the  investment  of  foreign  capital  in  Mexico, 


XX  CONTENTS 

PAGES 

484-488.  —  Alleged  advantages  of  the  silver  standard  for 
Mexico:    Sentiment  in  Mexico  in  favor  of  silver  standard, 
488-489. — Advantage  of  silver   standard  to  silver   mining 
industry,  489.  —  Advantage  to  export  trade,  490-493.  —  Pro- 
tection to  home  industries  given  by  silver  standard,  493-494. 

CHAPTER  III 

COMMISSIONS  INVESTIGATE  THE  SUBJECT  OF  CURRENCY  REFORM 

FOR  MEXICO 495-518 

Commissions  on  International  Exchange,  495-499.  — 
Mexican  Monetary  Commission :  Membership,  and  task  as- 
signed, 497-498.  Organization  and  apportionment  of  work, 
498-502.  —  Work  of  fifth  subcommission  representing  Com- 
mission as  a  whole:  Its  problem,  502-503.  Recommends 
abandonment  of  silver  standard,  503.  Recommends  a  new 
silver  peso  and  new  fractional  coins,  503-505.  Favors  Indian 
plan  for  attainment  of  gold  standard,  505-506.  Considers 
question  of  justice  between  debtor  and  creditor,  506-508. 
Considers  other  transitional  matters,  508.  —  The  question  of 
a  gold  reserve:  Disagreement  upon,  leading  to  a  majority 
and  a  minority  report,  508-509.  The  majority  report  un- 
favorable to  immediate  creation  and  use  of  a  gold  reserve, 
509-511.  The  minority  report  favorable  to  the  immediate 
establishment  and  use  of  a  gold  reserve,  511-512.  The 
debate  over  a  gold  reserve,  512-518.  —  Monetary  Commis- 
sion approves  report  of  fifth  subcommission  and  submits  it  as 
the  Commission's  report  to  Finance  Minister,  518. 

CHAPTER  IV 

A  GOLD-STANDARD  PLAN  ADOPTED Si 9" 533 

A  currency  reform  bill  modeled  closely  upon  plan  recom- 
mended by  Monetary  Commission  is  submitted  to  Mexican 
Congress  by  the  Finance  Minister,  519-523.  —  Reception 
given  to  proposed  currency  reform  legislation,  523-524.  — 
Currency  reform  bill  passed  and  various  executive  orders 
issued  under  its  authority,  524-526.  —  Restrictions  placed 
upon  the  issue  of  bank  notes,  526-530.  —  Measures  to  allevi- 
ate the  hardships  expected  to  result  to  the  mining  interests 
from  the  currency  reform,  530.  —  Establishment  of  a  re- 
serve fund  and  creation  of  a  commission  to  administer  it, 
531-533- 


CONTENTS  xxi 

CHAPTER  V 

PAGES 

How  THE  PLAN  WORKED 534-547 

Gold  standard  plan  favorably  received,  534-535.  —  Move- 
ment of  exchange  rates  in  Mexico,  1901-1908,  535.  — Influx 
of  pesos  into  Mexico,  536-537.  —  Problem  presented  to 
Mexico  by  the  rise  in  the  gold  price  of  silver  in  1905-1906, 
538-539.  —  How  the  Mexican  Government  solved  the  prob- 
lem and  incidentally  placed  the  currency  system  upon  a 
strict  gold  standard,  539-547.  —  Mexican  gold  standard 
breaks  down  as  a  result  of  recent  domestic  revolutions,  547. 

APPENDIX  A 

EXCHANGE  RATES  IN  THE  CITY  OF  MEXICO  ON  NEW  YORK,  DE- 
MAND BANK  PAPER,  1903  TO  1908,  MONTHLY,  EXPRESSED  IN 
TERMS  OF  THE  NUMBER  OF  UNITED  STATES  CENTS  TO  A 
MEXICAN  PESO 549 

APPENDIX  B 

BIBLIOGRAPHY  OF  MEXICAN  CURRENCY  REFORM  SHOWING  PRIN- 
CIPAL REFERENCES  CITED 550-552 

GENERAL  INDEX 553-564 


PART  I 
THE   INDIAN   CURRENCY   REFORM 


MODERN   CURRENCY   REFORMS 

CHAPTER  I 
INDIAN  MONETARY  HISTORY  PRIOR  TO  1892 

ASIDE  from  the  discontinuance  of  bimetallism  by  France 
and  the  other  states  of  the  Latin  Union  in  the  early  seven- 
ties of  the  last  century,  no  recent  currency  reform  has 
aroused  such  widespread  interest  and  keen  controversy 
among  economists  as  that  of  India.  Although  India  is 
" different"  from  occidental  countries,  and  her  problems 
often  appear  remote,  none  the  less  few  chapters  in  mone- 
tary history  are  more  illuminating  to  the  principles  of 
monetary  science  than  this  Indian  experience.  The  litera- 
ture on  the  subject  is  voluminous ;  scarcely  a  year  passes 
that  does  not  produce  several  books  on  Indian  currency. 
Since  1892  the  subject  has  been  investigated  by  three 
governmental  commissions  and  each  has  issued  an  elabo- 
rate report,  while,  to  the  inquiring  student,  the  magazine 
literature  seems  to  be  limitless.  Despite  this  great  amount 
of  material,  however,  there  is  nowhere  available  an  ac- 
count of  the  reform  that  is  at  once  brief,  comprehensive, 
and  scientific.1  And  yet  this  is  the  type  of  treatment  for 
such  a  subject  that  most  American  readers  desire.  This 
essay  is  an  attempt  to  meet  the  needs  of  such  American 
readers,  and  to  furnish  a  background  for  the  study  of 

1  The  nearest  approach  to  such  an  account  is  one  by  A.  Piatt  Andrew 
on  Indian  Currency  Problems  of  the  Last  Century,  in  The  Quarterly  Journal 
of  Economics,  XV,  1901,  pp.  483-516.  This  article,  however,  covers  only 
about  half  of  the  period  of  the  reform. 

3 


4  MODERN    CURRENCY   REFORMS 

subsequent  currency  reforms  in  other  countries  —  reforms 
in  which  the  governmental  authorities  have  often  drawn 
heavily  upon  the  lessons  of  Indian  experience. 

Coinage  History  Prior  to  1892 

The  earliest  monetary  system  of  India  1  which  can  be 
traced  was  based  upon  weights  of  fine  metal,  silver,  gold, 
or  copper,  preference  being  given  to  silver. 

4 'The  unit  of  weight  was  the  rati  (1.75  grs.  troy),  which 
was  the  seed  of  the  .  .  .  'wild  liquorice.'  A  hundred  ratis 
.  .  .  formed  the  .  .  .  sataraktika,  a  weight  of  fine  metal 
which  .  .  .  has  developed  into  the  rupee  of  the  British 
Government.  .  .  .  From  the  standard  weight  of  100  ratis 
originated  in  1542  the  rupyam  (or  silver  coin)  of  Sher  Shah, 
weighing  some  176  grs.,  soon  to  be  followed  by  a  multitude 
of  local  rupees,  each  with  its  own  weight  and  fineness. 
The  earliest  English  rupee  was  the  'Rupee  of  Bombaim'  of 
1677,  weighing  167.8  grs.  But  it  was  not  till  the  establish- 
ment of  British  rule  in  1758  that  British  rupees  were 
largely  coined."2 

A  Bengal  regulation  of  1793  mentions  no  less  than  27 
varieties  of  rupees  as  current  in  the  several  districts.3 
While  silver  was  the  most  widely  used  standard  over  India, 
gold  coins  also  circulated  at  varying  rates,  and  appear  to 
have  been  the  principal  currency  in  Madras.4  At  intervals 
gold  coins  in  different  provinces  were  made  legal  tender, 
but  the  circulation  of  these  coins  was  usually  at  market 
valuations  based  upon  the  price  of  bullion.  Although  the 
East  India  Company  as  early  as  1806  had  declared  its 
intention  to  put  an  end  to  the  losses  and  inconveniences 

1  The  material  of  this  early  history  has  been  taken  chiefly  from  Robert 
Chalmers,  A  History  of  Currency  in  the  British  Colonies,  pp.  336-348. 

2  Ibid.,  pp.  336-337. 

3  Ibid.,  p.  337  and  note. 

4  Ibid.,  pp.  340-343. 


INDIAN   MONETARY   HISTORY   PRIOR   TO    1892  5 

arising  from  the  "  circulation  of  so  many  denominations  of 
gold  and  silver  coins  of  different  values  in  different  dis- 
tricts [by  establishing]  one  general  system  for  the  forma- 
tion of  the  coin  for  the  currency  of  the  whole  of  our  posses- 
sions on  the  Continent  of  Asia/' 1  it  was  not  until  1835 
that  one  uniform  silver  rupee  was  made  the  standard 
throughout  British  India.  The  type  of  rupee  chosen  both 
as  to  weight  and  fineness  was  the  Madras  rupee  of  1818. 
This  rupee  had  had  its  gross  weight  of  180  grains  based 
upon  that  of  one  of  the  earlier  rupees,  and  its  fineness  of 
1 1/ 1 2  based  upon  that  of  English  gold  coins,  which  a  report 
of  a  Committee  of  Council  of  1803  on  the  London  Mint 
considered  "would  be  equally  proper  for  silver  coin."  2 
From  the  Act  (No.  XVII)  of  1835  to  the  present  time, 
the  weight  and  fineness  of  the  rupee  has  remained  un- 
altered ;  although  in  1862  (Act  No.  XIII)  the  name  of 
the  coin  was  changed  from  " Company's  rupee"  to  "the 
government  rupee,"  and  the  East  India  Company's  coat 
of  arms  gave  place  to  the  Queen's  effigy  as  the  emblem  on 
the  coin. 

Other  silver  coins  are  the  half-rupee,  quarter-rupee  or 
4-anna  piece,  and  eighth-rupee  or  2 -anna  piece.  All  of 
these  fractional  pieces  are  of  the  same  fineness  as  the  rupee 
and  of  proportionate  weights.  The  rupee  and  half-rupee 
are  unlimited  legal  tender,  while  the  other  silver  coins 
are  legal  tender  only  for  fractions  of  a  rupee.  Down  to 
June  26,  1893,  tne  Indian  mints  were  open  for  the  free 
coinage  of  silver  when  offered  in  sums  of  not  less  than 
1000  tolas*  The  Coinage  charges  were  2  per  cent  for  silver 
1 1/ 1 2  fine,  in  addition  to  .1  per  cent  for  melting.4 

The  Act  of  1835  declared  that  "no  gold  coin  shall  hence- 

1  Cf.  Chalmers,  ibid.,  p.  338. 

2  Ibid.,  p.  338  and  note. 

8  A  tola  is  180  grains  of  silver,  11/12  fine,  or  165  grains  of  pure  silver 
with  15  grains  of  alloy  —  the  exact  content  of  a  rupee. 

4  A  refining  charge  was  also  made  when  the  silver  was  lower  than  11/12 
fine  or  otherwise  unfit  for  coinage. 


6  MODERN    CURRENCY   REFORMS 

forward  be  a  legal  tender  for  payment  in  any  of  the  territo- 
ries of  the  East  India  Company."  It  none  the  less  author- 
ized the  coinage  of  a  gold  piece  known  as  the  mohur,  of  the 
same  weight  and  fineness. as  the  rupee,  which  was  to  cir- 
culate at  its  bullion  value.  For  the  period  from  1800  to 
1835  Frederick  C.  Harrison  estimated  that  Indian  gold 
coins  to  the  amount  of  3.8  million  ounces  of  fine  gold  were 
minted  in  England.1  These  coins  were  chiefly  in  units 
known  as  the  pagoda  2  (worth  about  $1.81)  which  circulated 
in  southern  India,  and  the  mohur  (worth  approximately 
15  rupees  or  about  $7.10)  which  circulated  more  widely. 

Efforts  to  Introduce  Gold  into  Circulation.  After  1835 
efforts  were  frequently  made  to  introduce  gold  into  cir- 
culation; and  as  early  as  1841  government  treasuries 
were  authorized  to  receive  gold  mohurs  at  the  rate  of  15 
rupees  to  the  mohur.  The  new  mohurs,  however,  were  not 
popular,  and  by  1847  g°ld  formed  no  part  of  the  currency. 
Then  followed  the  gold  discoveries  of  California  and  Aus- 
tralia, and  the  resulting  decline  in  the  value  of  gold  relative 
to  silver.  Gold  flowed  into  India  in  large  quantities,  and 
by  1852  some  five  million  rupees  worth  of  gold  had  piled 
up  in  the  government  treasuries.  Not  finding  these  gold 
coins  acceptable  for  public  expenditure,  the  Government 
issued  a  Notification  (December  22,  1852)  that  beginning 
with  the  new  year  "no  gold  coin  will  be  received  on  account 
of  payments  due,  or  in  any  way  to  be  made,  to  the  Govern- 
ment in  any  public  treasury  within  the  territories  of  the 
East  India  Company."  3 

Gold  might  still  be  brought  to  the  mints  for  coinage.  It 
did  not  depreciate  to  the  extent  feared,  and  soon  there  ap- 
peared many  proposals  for  the  extended  use  of  gold  in  India's 
circulation.4  One  widely  favored  proposal  was  for  the 

1  Cf.  Chalmers,  p.  343. 

2  Ibid.,  p.  342. 

3  Ibid.,  p.  344. 

4  Russell,  Henry  B.,  International  Monetary  Conferences,  etc.,  pp.  31-32. 


INDIAN   MONETARY   HISTORY   PRIOR   TO   1892  7 

circulation  of  the  British  sovereign  as  the  equivalent  of  ten 
rupees,  with  a  2o-rupee  legal  tender  limit.  In  November 
1864  the  Government  of  India  issued  a  Notification  making 
sovereigns  and  half-sovereigns  receivable  at  government 
treasuries  at  the  rate  of  10  rupees  to  the  sovereign,  and 
authorizing  the  treasuries  to  pay  them  out  to  any  person 
willing  to  receive  them  in  payment  of  claims  against  the 
Government.  The  Calcutta  Chamber  of  Commerce  in 
1866  recommended  the  adoption  of  a  gold  currency ;  and 
in  the  same  year  the  Mansfield  Commission  made  its  Re- 
port 1  advising  the  Government,  in  view  of  the  general 
wish  of  the  country,  to  cause  a  legal  tender  of  gold  to  be  a 
part  of  the  currency  arrangements  of  India.  In  accordance 
with  the  recommendations  of  the  Commission,  and  in 
expectation  of  the  early  introduction  of  gold  as  a  legal  tender 
in  India,  the  Government,  on  the  28th  of  October,  1868, 
issued  a  Notification  that  British  and  Australian  sovereigns 
and  half-sovereigns  should  thenceforward  be  "  received  in 
all  the  treasuries  of  British  India  and  its  dependencies,  in 
payment  of  sums  due  to  the  Government,  as  the  equivalent 
of  10  rupees  4  annas,  and  5  rupees  2  annas,  respectively; 
and  that  such  sovereigns  shall,  whenever  available  to  any 
government  treasury,  be  paid  at  the  same  rates  to  any 
persons  willing  to  receive  them  in  payment  of  claims  against 
the  Government."  2  The  gold  mohurs  of  1835  were  to  be 
received  in  like  manner  at  the  rate  of  1 5  rupees  to  the  mohur. 
Shortly  after  this  action  was  taken,  however,  the  states 
of  the  Latin  Union  closed  their  mints  to  the  free  coinage  of 
silver,  and  the  silver  price  of  gold  began  its  long  and  pro- 
nounced upward  move,  with  the  result  that  gold  practically 
disappeared  from  circulation  in  India. 

Agitation  for  Currency  Reform.  This  breakdown  in 
the  comparatively  fixed  ratio  that  had  so  long  existed 
between  the  values  of  gold  and  silver,  and  the  subsequent 

1  House  of  Commons  Papers,  No.  148  of  1866.     See  also  Chalmers,  pp. 
344-345.  2  Chalmers,  p.  345. 


8  MODERN   CURRENCY   REFORMS 

instability  in  India  of  English  exchange  and  exchange 
on  other  gold  standard  countries,  caused  serious  dis- 
turbances in  India's  foreign  trade,  and  added  greatly  to 
her  burdens  in  the  meeting  of  her  gold  obligations.  Be- 
ginning about  1873,  therefore,  there  was  a  twenty-year  pe- 
riod of  agitation  for  currency  reform  in  India.  This  period 
has  been  divided  into  three  parts  by  Dr.  H.  R.  Read  in  an 
unpublished  dissertation  on  The  Development  of  a  Qualified 
Gold  Exchange  Standard  in  India.1  They  are:  (i)  1873  to 
1878,  a  period  characterized  by  dissatisfaction  with  the 
silver  standard,  and  agitation  for  reform  directed  chiefly 
toward  proposals  for  the  closing  of  the  Indian  mints  to  the 
free  coinage  of  silver,  usually  with  the  idea  of  sooner  or 
later  placing  the  country  upon  a  gold  standard.  (2)  1878 
to  the  calling  of  the  International  Monetary  Conference  at 
Brussels  in  1892,  a  period  in  which  the  hopes  for  currency 
reform  in  India  in  the  minds  of  her  leading  statesmen  rested 
upon  the  securing  of  an  international  agreement  for  bi- 
metallism. In  probably  no  other  country  of  the  world  was 
the  judgment  of  leading  men  so  favorable  to  international 
bimetallism  as  in  India.  (3)  From  the  calling  of  the 
Brussels  Conference  in  1892  to  the  closing  of  the  Indian 
mints  in  June  1893,  a  period  when,  largely  as  a  result  of 
English  hostility  to  bimetallism,  all  hope  of  securing  an 
international  bimetallic  agreement  was  lost. 

Paper  Currency  in  India  to  1892 

Before  discussing  the  events  immediately  leading  to  the 
closing  of  the  Indian  mints,  it  will  be  well  to  describe  briefly 
India's  paper  currency  system,  since  this  system  played 
an  important  role  in  the  country's  subsequent  monetary 
history. 

The  banks  of  India  had  been  denied  the  privilege  of  bank- 

1  The  dissertation  was  written  in  1913  and  is  deposited  in  the  Cornell 
University  Library.  See  pp.  32-33. 


INDIAN   MONETARY   HISTORY   PRIOR   TO    1892  g 

note  issue  since  I86I.1  At  that  time  the  Indian  Govern- 
ment assumed  a  monopoly  of  the  right  to  issue  paper 
money  —  a  monopoly  which  it  has  since  retained.  The 
Indian  notes  are  based  upon  a  plan  fundamentally  like 
that  of  the  Bank  of  England  notes  under  the  Peel  Act  of 
1844,  the  chief  difference  being  that  they  are  issued  by  a 
government  department,  instead  of  by  an  issue  department 
of  a  bank.2  There  is  a  fixed  amount  of  notes  issued  against 
securities.  This  " fiduciary  circulation"  was  originally 
fixed  at  40  million  rupees  but  had  been  raised  from  time 
to  time,  until  on  March  31,  1893,  it  stood  at  80  million.3 
All  other  notes  were  required  to  be  supported  by  silver 
or  gold  coin  or  bullion.4  For  the  purposes  of  the  paper 
currency  India  was  divided  into  "circles,"  at  that  time 
eight  in  number.  The  notes  were  legal  tender  only  in  the 
" circle"  for  which  they  were  issued,  and  as  a  rule  were  con- 
vertible into  rupees  only  at  the  office  of  issue,  and  (except 
in  the  case  of  British  Burma)  at  the  principal  city  of  the 
Presidency  to  which  the  " circle"  of  issue  belonged.5  Inas- 

1  Prior  to  1 86 1  the  banks  of  Bengal,  Madras,  and  Bombay  had  the  right 
of  issue. 

2  The  original  Act  establishing  the  government  paper  currency  was  Act 
No.  XIX  of  1861.    It  was  amended  from  time  to  time,  and  codified  in 
Act  XX  of  1882  which  was  the  main  act  in  force  in  1893.    Chalmers,  pp. 
346-347. 

3  Report  of  the  Committee  Appointed  to  Inquire  into  the  Indian  Currency, 
London,  (C.  7060),  1893,  known  by  the  name  of  its  chairman,  Lord  Herschell, 
and  hereafter  cited  as  "Herschell  Committee  Report,"  sec.  71. 

4  They  were  issuable  on  demand  in  exchange  for  (a)  current  silver  coins  of 
India  at  par;    (b)  silver  bullion  or  foreign  silver  coins  on  the  basis  of  165 
grains  of  pure  silver  to  the  rupee  plus  a  charge  of  2.1  per  cent  to  cover  coining 
and  melting  expenses ;  (c)  a  limited  amount  of  gold  bullion  at  rates  to  be  fixed 
by  the  government  from  time  to  time ;   (d)  notes  of  other  denominations  of 
the  same  "circle."     Chalmers,  p.  346. 

6  Herschell  Com.  Rep.,  sec.  71.  Writing  in  1891  Mr.  F.  C.  Harrison 
said :  "There  are  at  present  eight  issuing  circles,  which  as  a  rule  only  cash 
their  own  notes,  an  exception  being  made  in  favor  of  travellers,  and  also  on 
those  occasions  when  the  encashment  of  foreign  circle  notes  suits  the  in- 
terests of  Government.  It  has  always  been  considered  impracticable  to 
have  one  note  changeable  throughout  the  country.  Notes  of  large  denom- 
inations [ —  the  denominations  varied  from  5  rupees  to  10  thousand 


10  MODERN   CURRENCY   REFORMS 

much  as  the  law  did  not  state  where  the  note  reserves  should 
be  located,  it  was  the  policy  of  the  Government  to  shift 
the  funds  in  the  note  reserve  from  district  to  district,  and 
from  treasury  to  treasury,  through  debits  and  credits,  so 
as  to  count  surplus  silver  accumulations  in  whatever  govern- 
ment treasuries  located  as  part  of  the  Paper  Currency  Re- 
serve, and  to  release  for  more  active  services  of  Government 
the  silver  which  had  accumulated  as  note  reserve  in  places 
where  coin  was  in  stronger  demand.1 

At  the  end  of  March  1893,  the  total  circulation  of  govern- 
ment notes  was  in  round  numbers  R.  264  millions  against 
which  there  were  held  R>  175  millions  in  coin,  R.  8.7 
millions  in  bullion,  and  R.  80  millions  in  securities.2  This 
note  circulation  was  equivalent  to  about  one  fifth  of  the 
metallic  circulation  of  India,  exclusive  of  the  coin  held  in 
the  Paper  Currency  Reserve.3 

rupees  — ]  are  commonly  employed  for  remittance  purposes,  and  the  result 
of  cashing  them  freely  would  be  a  constant  shifting  of  government  funds  at 
considerable  expense  in  order  to  discharge  them."  The  Economic  Journal, 

I,  1891,  p.  726.     Cf.  infra,  pp.  135-136. 

1  Harrison,  ibid.,  p.  727. 

2  Herschell  Com.  Rep.,  sec.  71. 

3  Cf.  estimates  of  circulation  of  India  made  by  F.  C.  Harrison,  later  ac- 
countant general  of  Madras,  in  The  Economic  Journal,  I,  1891,  pp.  721-751 ; 

II,  1892,  pp.  257-279;  and  IV,  1893,  pp.  262-269;   also  F.  Y.  Edgeworth's 
criticisms  of  Harrison's  method  and  calculations  in  Econ.  Jour.,  II,  1892, 
pp.  162-169;  and  IV,  1894,  pp.  109-113. 


CHAPTER  II 
HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT 

BEFORE  the  convening  of  the  International  Monetary 
Conference  at  Brussels  in  1892  the  opinion  became  wide- 
spread in  India  that  the  efforts  to  be  made  in  the  Conference 
to  secure  an  international  bimetallic  agreement  would  be 
as  futile  as  had  been  those  of  the  international  conferences 
of  1878  and  1 88 1.  On  February  18,  1892,  eight  months 
before  the  Brussels  Conference  convened,  the  Bengal  Cham- 
ber of  Commerce  declared  that  it  was  "  impossible  for  men 
of  business  to  feel  any  confidence  in  the  future  value  of  the 
rupee,"  and  that  they  believed  that  this  state  of  things 
restricted  the  investment  of  capital  in  the  country  and 
seriously  hampered  legitimate  enterprise.  The  Chamber 
said  that  if  an  international  bimetallic  agreement  should 
prove  unattainable,  it  saw  nothing 

"but  the  prospect  of  endless  fluctuations  in  the  relative 
values  of  silver  and  gold,  attended  with  a  fall  in  the  value  of 
silver  of  indefinite  amount;  and  the  Committee  [of  the 
Chamber  of  Commerce]  think  that  in  such  case  the  Govern- 
ment of  India  should  take  steps  to  have  the  question  of  the 
advisability  of  introducing  a  gold  standard  into  India  care- 
fully and  seriously  considered  by  competent  authorities."  1 

In  a  despatch  of  March  23,  1892,  the  Government  of  India, 
although  urging  the  Secretary  of  State  to  support  any  pro- 
posals that  might  be  made  by  the  United  States  or  any 
other  country  for  the  settlement  of  the  silver  question  by 

1  Cf.  Report  of  the  Committee  Appointed  to  Inquire  into  the  Indian 
Currency  (Cd.  9390),  1899,  sec.  n.  Hereafter  cited  under  name  of  the 
chairman  of  the  Committee,  Henry  H.  Fowler,  as  "  Fowler  Com.  Rep." 


12  MODERN   CURRENCY   REFORMS 

international  agreement,  said  that  it  seemed  probable 
that,  failing  an  international  agreement,  the  United  States 
would  be  forced  to  stop  the  purchase  and  coinage  of  silver.1 
They  accordingly  requested  the  British  Government,  in 
view  of  this  contingency,  to  take  under  consideration  the 
question  whether  any  measures,  and  if  so,  what  measures, 
could  be  adopted  for  the  protection  of  Indian  interests.2 
Three  months  later  (June  21),  the  Government  of  India 
declared  it  to  be  its 

"deliberate  opinion  that,  if  it  becomes  evident  that  the 
International  Conference  is  unlikely  to  arrive  at  a  satis- 
factory conclusion,  and  if  a  direct  agreement  between  India 
and  The  United  States  is  found  to  be  unattainable,  the 
Government  of  India  should  at  once  close  its  mints  to  the 
free  coinage  of  silver  and  make  arrangements  for  the 
introduction  of  a  gold  standard."  3 

The  Brussels  Monetary  Conference  suspended  its  labors 
December  17  without  having  accomplished  anything 
definite  in  the  line  of  an  international  agreement,  under  a 
resolution  to  meet  again  May  30,  1893,  "  should  the  Govern- 
ments approve."  4  But  the  Conference  did  not  reconvene. 
Shortly  after  it  suspended  its  labors  the  Government  of 
India  telegraphed  in  further  detail  its  proposals  to  the  Sec- 
retary of  State : 

1  An  important  factor  in  the  Indian  situation  at  this  time  was  the  fact  that 
the  United  States,  under  the  provisions  of  the  Sherman  Silver  Purchase  Act 
of  1890,  was  compelled  to  buy  4,500,000  ounces  of  silver  every  month,  in 
payment  for  which  it  issued  "treasury  notes."     These  purchases  for  a  time 
artificially  buoyed  up  the  price  of  silver,  but  the  accumulation  of  silver  was 
becoming  dangerously  large,  and  the  silver  market  was  in  a  precarious  con- 
dition because  of  the  agitation  for  the  repeal  of  this  Act  and  the  further 
danger  that  much  of  this  accumulated  silver  might  be  thrown  upon  the 
market. 

2  Fowler  Com.  Rep.,  sec.  n. 

3  Ibid.,  sec.  n. 

4  International  Monetary  Conference  held  at  Brussels,  1892,  Report  of  the 
Commissioners  on  behalf  of  the  United  States,  and  Journal  of  the  Sessions  of 
November  22,  1892  to  December  17,  1892,  p.  359. 


HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT    13 

"Our  proposal  is  that  we  shall  take  power  to  issue  a  noti- 
fication declaring  that  English  gold  coins  shall  be  legal 
tender  in  India  at  a  rate  of  not  less  than  13^  rupees  for  one 
sovereign  [i.e.,  iSd.  per  rupee].  ...  An  interval  of  time, 
of  which  the  length  cannot  be  determined  beforehand, 
should,  we  think,  elapse  between  the  mints  being  closed  and 
any  attempt  being  made  to  coin  gold  in  India.  The  power 
to  admit  sovereigns  as  legal  tender  might  be  of  use  as  a 
measure  ad  interim,  but  it  need  not  be  put  into  force  except 
in  case  of  necessity."  l 

On  October  21,  1892,  a  month  before  the  Brussels  Mone- 
tary Conference  convened,  the  Government  of  India's 
proposal  of  June  21  was  referred  by  the  Secretary  of  State 
for  India  to  a  committee  of  seven  members  of  which  Lord 
Herschell  was  made  chairman,  with  instructions  to  consider 
the  proposals  of  the  Government  of  India  and  to  advise 
whether  it  was  expedient  for  the  Home  Government  to 
allow  them  to  be  carried  into  effect. 

The  Committee  held  1 2  hearings  at  the  India  Office  in 
London  between  October  27,  1892  and  February  2,  1893, 
and  examined  28  witnesses.  With  one  exception  all  the 
witnesses  were  Europeans,  16  of  them  had  had  business  or 
governmental  experience  in  India  or  Ceylon,  while  3  others 
were  connected  with  English  business  houses  carrying  on 
trade  with  India.  Of  the  25  witnesses  who  expressed  them- 
selves regarding  Indian  conditions,2  13  were  opposed  to 
India's  going  over  to  the  gold  standard,  and  12  were  favor- 
able to  such  action.  There  was  no  appreciable  attempt  to 
secure  the  opinion  of  natives  of  India  either  through 
testimony  taken  in  India  or  written  communication. 

Into  an  analysis  and  summary  of  this  testimony  the 
limits  of  a  brief  account  of  the  Indian  currency  reform 
do  not  permit  us  to  go.  It  will  be  sufficient  here  to  sum- 

1  Telegram  of  Jan.  22,  1893,  Fowler  Com.  Rep.,  sec.  n. 

2  One  spoke  only  concerning  the  currency  experience  of  the  United  States; 
one,  concerning  that  of  Brazil ;  and  one,  that  of  Java. 


14  MODERN   CURRENCY  REFORMS 

marize  briefly  the  conclusions  which  the  Committee  drew 
from  the  testimony,  to  give  a  statement  of  the  supporting 
reasons,  to  describe  the  reform  plan  recommended,  and  to 
consider  the  chief  arguments  advanced  by  the  supporters 
of  the  plan  and  by  its  opponents. 

The  chief  defects  of  the  Indian  currency  system   the 
Herschell  Committee  found  to  be : 

I.  Financial  burdens  and  inconveniences  imposed  upon 
the  Indian  Government  by  the  falling  rates  of  exchange 
with  gold  standard  countries. 

II.  Evil  effects  of  the  fall  of  exchange  upon  the  people  of 
India  through  its  influence  on  Indian  commerce. 

III.  Hardships  caused    by  the  fall  in  exchange  upon 
Europeans  in  official  and  business  life  in  India,  i.e.,  persons 
whose  salaries  and  wages  were  paid  in  silver  but  whose  re- 
mittances home  were  made  upon  a  gold  basis. 

Let  us  consider  these  three  alleged  defects  of  the  Indian 
currency  system  in  the  order  named. 

I.    Financial  Burdens  and  Inconveniences  Imposed   upon 
the  Indian  Government 

By  far  the  most  powerful  influence  leading  to  the  dis- 
continuance of  the  silver  standard  in  India  was  the  financial 
burden  which  that  system  imposed  upon  the  Indian  fisc. 
Every  year  India  had  heavy  payments  to  make  in  England 
-the  so-called  "home  charges."  These  payments  were 
on  a  gold  basis,1  and  most  of  them  were  comparatively 
fixed.  They  covered  such  items  as  interest  and  annuities 
on  the  gold  debt,  salaries,  pensions,  and  leave  of  absence 
allowances  of  employees  in  the  Indian  service  working  in 
England  or  employees  who  had  returned  to  England  from 
India  and  were  there  paid  on  a  gold  basis,  purchases  of 

1 A  small  amount  of  the  public  debt  expressed  in  rupees  and  therefore  on 
a  silver  basis  was  held  in  England  —  how  much  the  evidence  does  not  show. 
Cf.  Herschell  Com.  Rep,,  Evidence,  Qs.  2227-29. 


HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT    15 

supplies  in  England  for  the  Indian  service,  and  other  ex- 
penses incurred  for  Indian  governmental  establishments. 
The  total  of  these  home  charges  for  1892  was  computed  at 
£16  millions  sterling.1  From  1872-73  to  1892-93  the  net 
annual  disbursements  of  the  Indian  Government  in  England 
(excluding  payments  for  the  discharge  of  debts  and  all  capi- 
tal transactions)  varied  between  £13.3  millions  and  £16.8 
millions.2 

The  gold  value  of  the  rupee  as  measured  by  the  average 
exchange  rate  in  London  on  India  for  the  fiscal  year  1872-73 
was  22.75^.,  which  meant  that  it  cost  India  in  that  year 
approximately  R.  10.55  to  lay  down  a  pound  sterling  in 
London ;  in  1892-93  the  average  sterling  value  of  the  rupee 
was  14.98^., 3  which  meant  that  it  cost  India  approximately 
R.  16.02  to  lay  down  a  pound  sterling  in  London  —  an 
increase  of  52  per  cent  in  20  years. 

But  this  was  not  all  the  story.  Not  only  had  the  gold 
value  of  silver  declined  rapidly  and  almost  continuously 
since  1873,  but  there  was  every  prospect  that  there  would 
be  a  greater  decline  in  the  near  future.  Repeated  efforts 
to  secure  an  international  bimetallic  agreement  had  failed, 
and  hope  for  relief  in  that  direction  was  rapidly  passing 
into  despair.  Moreover,  the  threatened  panic  in  the  United 
States  arising  in  large  part  from  the  pumping  into  the  circu- 

1  "The  home  charges"  were  itemized  as  follows  for  1892  by  Mr.  F.  C. 
Harrison :  figures  are  in  millions  of  pounds. 

Interest  on  debt  and  railroad  redemption  annuities £8.0 

Salaries  and  establishments  out  of,  but  debitable  to,  India     ...  0.6 

Annual  charges  exclusive  of  stores,  pensions,  and  leave  allowances  i.o 

Pensions 3.8 

Leave  allowances 0.6 

Stores  and  materials 2.0 

Total 16.0 

Silver  in  India,  Econ.  Jour.,  II,  1892,  p.  653. 

2  For  tabular  statement  of  these  home  charges  by  years  1850-51  to  1892-93 
see  Fowler  Com.  Rep.,  App.  II,  Table  No.  9,  p.  138. 

3  Ibid.,  p.  136. 


16  MODERN   CURRENCY  REFORMS 

lation  of  several  million  dollars  of  "treasury  notes"  each 
year  in  payment  for  the  4,500,000  ounces  of  silver  required 
to  be  purchased  monthly  by  the  Sherman  Silver  Purchase 
Act  —  an  amount  equal  to  about  one  third  of  the  world's 
monthly  production  of  silver  —  was  likely  at  any  moment 
to  lead  to  the  repeal  of  that  Act.  This  might  possibly  be 
followed  by  an  actual  dumping  upon  the  silver  market 
of  the  large  mass  of  silver  bullion  accumulated  in  the 
United  States  treasury.1 

The  financial  burdens  and  the  uncertainties  in  construct- 
ing the  annual  budgets  which  this  situation  created  were 
serious.  According  to  the  Herschell  Committee  Report, 
there  were  remitted  to  England  in  the  year  1892-93  £16.5 
millions,  which  at  the  average  rate  of  exchange  in  that  year, 
viz.  14.985^.,  required  a  payment  of  R.  264.8  millions.2  If 
this  could  have  been  remitted  at  the  exchange  rate  of  1873- 
74,  it  would  have  required  but  R.  177.5  millions.  Because 
of  changes  in  the  price  and  wage  levels  in  England,  interest 
rates,  etc.,  the  whole  of  this  difference  of  R.  87.3  millions 
could  not  properly  be  regarded  as  a  loss  tP  the  Government 
of  India  arising  from  the  difference  in  exchange. 

"It  is  certain,  however/'  said  the  Herschell  Committee, 
"that  India  had  actually  to  remit  in  1892-93  upwards  of 
Rx.  8,700,000  more  than  if  the  exchange  had  been  at  its 
former  point.3  At  an  estimated  exchange  is.  ^d.  per  rupee 
for  the  past  year,  a  surplus  of  revenue  over  expenditures 
was  shown  of  Rx.  146,600 ;  the  exchange  having  fallen  to 

1  In  the  Brussels  Conference  of  1892  this  situation  was  felt  to  be  very 
serious,  even  by  the  opponents  of  bimetallism.    Alfred  D.  Rothschild,  dele- 
gate of  Great  Britain,  said :  "  Gentlemen,  I  need  hardly  remind  you  that  the 
stock  of  silver  in  the  world  is  estimated  at  some  thousands  of  millions,  and  if 
this  Conference  were  to  break  up  without  arriving  at  any  definite  result 
there  would  be  a  depreciation  in  the  value  of  that  commodity  which  it  would 
be  frightful  to  contemplate  and  out  of  which  a  monetary  panic  would  ensue, 
the  far-spreading  effects  of  which  it  would  be  impossible  to  foretell."    Int. 
Mon.  Conf.  Rep.,  1892,  pp.  72-73. 

2  Herschell  Com.  Rep.,  sec.  3. 

8  "Rx."  is  a  symbol  commonly  used  in  India  to  refer  to  tens  of  rupees. 


HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT    17 

an  average  of  rather  less  than  15.  3^.,  this  surplus  has  been 
converted  into  an  estimated  deficit  of  Rx.  1,081,900,  not- 
withstanding the  improvement  of  the  revenue  by  Rx. 
1,653,300  over  the  budget  estimate.  Nor  is  this  all. 
The  Government  are  compelled  to  contemplate  a  further 
fall,  the  effect  of  which  cannot  be  forecast."  1 

Sir  David  Barbour,  Financial  Member  of  the  Council  of 
the  Viceroy  of  India  from  1888  to  1893,  said  in  a  published 
statement : 

"The  immediate  cause  of  our  financial  difficulties,  and 
the  cause  which,  by  comparison  and  for  the  time  being, 
dwarfs  all  others,  is  the  fall  in  the  gold  value  of  silver, 
which  .  .  .  has  added  to  the  Indian  expenditure  in  two 
years  more  than  four  crores  of  rupees.2  .  .  .  Our  financial 
position  for  the  coming  year  is  at  the  mercy  of  exchange, 
and  of  those  who  have  it  in  their  power  to  affect  in  any  way 
the  price  of  silver.  If  we  budget  for  the  present  deficit  of 
Rx.  1,595,100,  and  exchange  rises  one  penny,  we  shall  have  a 
surplus ;  if  it  falls  a  penny,  we  shall  have  a  deficit  of  more 
than  three  crores ;  if  we  impose  taxation  to  the  extent  of 
one  and  a  half  crores  of  rupees,  a  turn  of  the  wheel  may 
require  us  to  impose  further  taxation  of  not  less  magnitude ; 
another  return,  and  we  may  find  that  no  taxation  at  all  was 
required."  3 

Depreciation  of  Silver  or  Appreciation  of  Gold?  An 
adequate  understanding  of  the  situation  will  require  at 
this  point  a  brief  consideration  of  the  time-honored 
question  as  to  whether  this  great  decline  in  the  Indian  ex- 
change rates  from  1872-93  to  1892-93  was  due  primarily  to 
a  depreciation  in  the  value  of  silver  or  to  an  appreciation  in 
the  value  of  gold.  In  the  year  1872-73  the  average  gold 
value  of  a  rupee  was  approximately  23^.;  conversely,  the 

1  Herschell  Com.  Rep.,  sees.  3-5. 

2  A  crore  is  10  million.    It  is  equal  to  100  lakhs,  a  lakh  being  100,000. 
1  Quoted  in  Herschell  Com.  Rep.,  sec.  5. 

c 


i8 


MODERN   CURRENCY   REFORMS 


MOVEMENTS  IN  VALUE  OF  GOLD  AND  SILVER,  1873-1893 


YEAR 

Value  in  United  King- 
dom  as   Measured 
by  Purchasing 
Power   over   Com- 
modities.      (Aver- 
age for  1873  =  ioo)1 

Gold  Value  of  Sil- 
ver.        (Average 
for  1873  =  100) 

Value  of  Rupee  in 
India    as    Meas- 
ured by  Purchas- 
ing   Power    over 
Commodities  3 

Value  of  Silver  in 
China   as   Meas- 
ured by  Purchas- 
ing   Power    over 
Commodities  * 

Index  Numbers 

Index  Numbers 

Index  Numbers 

Index  Numbers 

Gold1 

Silver' 

i873 

IOO 

IOO 

IOO 

IOO 

[IOO] 

1874 

109 

107 

98 

92 

92 

1875 

116 

III 

96 

103 

89 

1876 

H7 

104 

89 

IOO 

83 

1877 

118 

109 

92 

77 

91 

1878 

128 

113 

89 

72 

87 

1879 

134 

116 

86 

79 

83 

1880 

126 

in 

88 

QI 

88 

1881 

I31 

114 

87 

101 

84 

1882 

132 

115 

87 

102 

85 

1883 

135 

H5 

85 

IOI 

89 

1884 

146 

125 

85 

93 

88 

1885 

iS4 

127 

82 

94 

88 

1886 

161 

123 

77 

97 

86 

1887 

163 

123 

75 

96- 

88 

1888 

159 

US 

72 

90 

92 

1889 

154 

in 

72 

85 

88 

1890 

154 

124 

80 

85 

88 

1891 

154 

117 

76 

84 

88 

1892 

163 

no 

67 

76 

85 

1893 

163 

98 

60 

78 

84 

1  The  index  numbers  for  the  value  of  gold  are  the  reciprocals  of  the  Sauer- 
beck index  numbers  for  the  wholesale  prices  in  the  United  Kingdom  of  from 
43  to  45  commodities.     Figures  have  been  adjusted  by  dividing  by  a  con- 
stant so  that  the  number  for  the  year  1873  will  be  100,  thereby  making  each 
succeeding  figure  show  the  percentage  change  since  1873. 

2  The  average  gold  value  of  an  ounce  of  British  standard  silver  in  London, 
in  i8'73,  according  to  the  Pixley  and  Abell  tables,  was  59?^.      Taking  this  as 
100  and  multiplying  the  index  number  in  the  preceding  column  showing  the 
relative  purchasing  power  of  gold  over  commodities,  by  the  figure  showing 
the  percentage  decrease  or  increase  in  the  gold  value  of  silver  each  year,  we 
arrive  at  a  figure  showing  the  relative  purchasing  power  of  silver  bullion  over 
commodities  for  that  year.     For  example,  the  average  price  of  silver  in  1874 
was  sSjV/.  per  ounce;   the  gold  index  number  for  1874,  viz.  109,  would  be 

multiplied  by  — &  or  .984  to  obtain  the  silver  value  index  number  for  1874, 

59i 
that  is,  107.5. 

3  Reciprocals  of  Atkinson  index  numbers  for  Indian  prices. 

4  Reciprocals  for  index  numbers  for  prices  in  Shanghai,  as  given  by  Irving 


HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT    19 

average  silver  value  of  a  pound  sterling  was  10.4  rupees. 
Twenty  years  later  the  average  gold  value  of  the  rupee  was 
approximately  15^.,  and  the  average  silver  value  of  a  pound 
sterling  was  about  16  rupees.  To  the  people  in  England 
it  appeared  as  if  the  value  of  silver  had  fallen  by  about 
35  per  cent;  to  the  people  in  India  it  looked  as  if  the 
value  of  gold  had  risen  by  about  54  per  cent.  Did  silver 
depreciate  or  did  gold  appreciate,  or  did  both  movements 
take  place  ? 

The  value  of  gold  is  best  expressed  by  its  purchasing 
power,  not  over  one  commodity  like  silver,  but  over  a  large 
group  of  commodities ;  likewise  the  value  of  silver  is  best 
expressed  by  its  purchasing  power,  not  over  gold  alone,  but 
over  a  large  group  of  commodities.  By  this  test  the  evi- 
dence seems  conclusive  that,  regardless  of  causes  and  re- 
gardless of  subsequent  events,  for  the  greater  part  of  the 
period  1872-73  to  1892-93,  the  decline  in  the  gold  price  of 
silver  was  chiefly  an  expression  of  an  appreciation  of  gold,» 
not  of  a  depreciation  of  silver.  The  character  of  the  evi-\ 
dence  supporting  this  conclusion  may  be  seen  from  the 
preceding  table  and  the  following  chart,  showing  the  move- 
ment of  the  value  of  gold  as  expressed  in  its  purchasing 
power  over  commodities  in  England,  and  that  of  the  value 
of  silver  as  expressed  in  its  purchasing  power  over  com- 
modities in  England,  India,  and  Shanghai,  respectively. 

Of  the  four  curves  that  of  gold  was  clearly  the  most 
unstable,  while  that  representing  the  value  of  silver  in 
Shanghai  was  the  most  stable.  Silver  in  England,  instead  of 
declining  in  value,  actually  moved  upward  during  most  of 
the  period  —  doubtless  being  buoyed  up  artificially  during 
much  of  the  time  by  the  heavy  purchases  of  silver  by  the 

Fisher,  in  The  Rate  of  Interest,  App.  xxx,  p.  426.  They  are  based  upon 
20  inland  commodities,  17  articles  of  export  and  15  foodstuffs.  Inasmuch 
as  the  figures  begin  with  1874  as  100,  and  as  the  purchasing  power  of  silver 
in  India  fell  8  per  cent  from  1873  to  X874,  I  have  assumed  the  same  decline 
for  China,  calling  the  1874  figure  92  instead  of  100,  and  reducing  all  the  others 
proportionately,  thereby  making  the  column  comparable  with  the  others. 


20 


MODERN   CURRENCY   REFORMS 


American  Government  under  the  Bland-Allison  Act  and 
later  under  the  Sherman  Silver  Purchase  Act.  Its  apparent 
decline  in  England  down  to  1890  was  due  to  the  fact  that 


160 
J.50 
1.40 
130 
^80 
,110 
.100 

90 

SO 
70 

RELATIVE  VALUES 
OF 
GOLD  AND  SILVER 
As  Expressed  in  Purchasing 
Power  over  Commodities  / 
1873  to  1893           / 

f* 

/ 

... 

160 
150 
140 
130 
130 
110 
100 
90 
80 
70 

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S. 

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3 

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y 

y 

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£ 

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v.* 

i* 

^ 

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s, 

s 

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V 

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\ 

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„, 

5 

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, 

s..^ 

*  / 

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IJV 

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-- 

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B£T    ••&£••••••••••••    89     aao> 

SaaSsaaaSlilasSSaisa 

the  price  of  silver  bullion  was  always  stated  in  terms  of 
the  rapidly  appreciating  gold  money  of  the  country.  In 
India  the  value  of  the  rupee  as  measured  by  its  purchasing 
power  over  commodities  l  varied  much  less  widely  than  did 
that  of  the  pound  sterling  in  England  —  and  this  is  par- 
ticularly true  if  one  eliminates,  as  it  is  reasonable  to  do,  the 
heavy  drop  in  the  value  of  the  rupee  (i.e.,  rise  in  rupee 
prices)  during  the  period  of  the  great  Indian  famine  of 
1877-79.  While  the  value  of  the  rupee  in  India  was  by  no 

1  The  Atkinson  index  numbers  for  India  are  based  on  prices  of  thirty-eight 
native  commodities  gathered  from  representative  parts  of  India,  and  weighted 
roughly  according  to  the  relative  importance  of  the  respective  commodities. 
Cf.  Jour.  Royal  Stat.  Soc.,  LX,  1897,  pp.  84-124;  and  LXXII,  1909,  pp. 
496-573;  also  U.  S.  Bur.  of  Labor  Statistics,  Bulletin  No.  173,  1915,  pp. 
276-282. 


HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT    21 

means  stable,  and  while  from  1887  to  1893  it  was  less  stable 
than  was  the  pound  sterling  in  England,  none  the  less,  taking 
the  period  as  a  whole,  the  rupee  varied  much  less  widely  in 
its  value  than  did  the  pound.  For  the  pound  the  extreme 
range  of  the  index  numbers  was  63  points  (100-163) ;  while 
for  the  rupee  it  was  but  31  points  (103-72).  Ignoring  the 
worst  famine  year,  i.e.  1878,  the  range  for  the  rupee  was 
but  27  points  ( 1 03-76).*  The  standard  coefficient  of  dis- 
persion for  the  fluctuations  in  the  value  of  the  pound  (1873- 
93)  was  .137,  and  that  for  the  fluctuations  in  the  value 
of  the  rupee  was  .106. 

We  may.  conclude  therefore  that  from  1873  to  1893  the 
increase  in  India's  home  charges  were  in  the  main  not 
nominal  but  real,  since  the  unit  in  which  her  fixed  obligations 
were  expressed  had  been  increasing  rapidly  in  size.1  She 
was  like  a  merchant  who  had  agreed  to  deliver,  over  a 
long  period  of  years,  in  return  for  a  lump  sum  payment,  a 
certain  number  of  yards  of  cloth  of  a  given  kind  annually 
and  who  unexpectedly  found  that  the  yardstick  was  in- 
creasing in  size  three  to  four  per  cent  a  year.2 

This  analogy,  like  most  analogies,  is  not  entirely  accurate. 
The  rupee  did  depreciate  during  the  latter  years  of  the 
period,  while  gold  during  those  years  was  comparatively 
stable.  Furthermore,  many  of  the  supplies  India  was  buy- 

1  Another  series  of  price  index  numbers  for  India  was  prepared  by  Sir 
James  Wilson  in  connection  with  a  paper  he  read  before  the  East  India 
Association  in  London  in  1911.     It  covered:    (i)  eleven  imported  articles, 
including  iron,  coffee,  cotton  goods,  sugar,  kerosene,  and  salt ;  and  (2)  seven 
food  grains  at  selected  stations  throughout  India.     For  the  period  1861-90 
by  decades  the  index  numbers  for  certain  groups  of  commodities  were : 

YEARS  n  IMPT.  ARTS.  7  FOOD  GRAINS 
1861-70                      in  115 

1871-80  90  117 

1881-90  84  107 

Cf.  [London]  Economist,  July  15,  1911,  p.  123. 

2  Inasmuch  as  the  purchasing  power  of  the  rupee  in  India  fell  somewhat, 
particularly  during  the  years  1887  to  1892,  a  small  part  of  the  increase  in 
the  home  charges  may  be  looked  upon  as  nominal. 


22  MODERN  CURRENCY  REFORMS 

ing  in  gold  standard  countries  were  being  bought  at  de- 
clining gold  prices  as  gold  depreciated.  The  following 
extract  from  the  testimony  of  Mr.  Frank  Forbes  Adams, 
an  English  merchant  who  had  lived  in  India  seventeen 
years,  suggests  certain  offsetting  factors  that  were  not 
adequately  allowed  for  in  most  of  the  official  statements 
emanating  from  India : 

"  The  loss  on  the  home  charges  has  largely  increased,  and 
yet,  in  that  connection,  I  should  like  to  say  that  it  seems  to 
me  that  usually  the  amount  of  loss  to  the  Government  in 
official  statements  and  otherwise  is  very  much  exagger- 
ated. For  instance,  in  the  Blue-book,  the  statistical  ab- 
stract of  British  India,  .  .  .  they  take  every  loan  as  if  it 
had  been  raised  on  the  equivalent  of  10  rupees  to  the  £i, 
that  is,  2S.  exchange,  whereas  very  few  loans  indeed  have 
been  raised  at  such  a  high  rate  as  that.  A  great  many  of 
them  have  been  raised  at  varying  rates  from  is.  nd.  to  is. 
gd.  down  to  is.  >jd. ;  that  is,  one  point.  Sometimes  the  loss 
on  the  annual  amount  spent  by  the  Government  in  stores  in 
this  country  is  added,  whereas,  as  a  matter  of  fact,  it  is  a 
very  ordinary  transaction,  where  you  buy  the  stores  at  the 
gold  price  and  draw  for  them  at  the  price  you  have  paid  at 
the  exchange  of  the  day.  There  is  no  actual  loss  to  govern- 
ment. They  have  the  advantage  of  a  fall  in  the  gold  price. 
Then  another  point  ...  is,  that  many  of  those  loans  were 
presumably  raised  in  England,  because  the  rate  of  interest 
was  lower  in  England  at  the  time  than  in  India ;  and  there- 
fore, where  annually  the  Government  of  India,  against  the 
loss  by  exchange  in  remitting  their  home  charges,  have  a 
gain  in  interest  as  compared  with  what  they  would  have 
been  paying  in  rupees  had  they  raised  the  money  originally 
in  rupees,  they  should  set  that  against  it  as  a  deduction."  1 

1  Herschell  Com.  Rep.,  Evidence,  Q.  1894. 


HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT    23 

//.  Evil  Effects  of  the  Fall  of  Exchange  through  Influence  on 
Indian  Commerce 

The  second  evil  of  the  Indian  currency  system  in  1893, 
and  one  emphasized  by  the  Herschell  Committee,  was  the 
harmful  influence  of  a  falling  and  fluctuating  exchange 
upon  India's  foreign  trade,  particularly  her  import  trade. 
India's  exchange  rates  with  silver  standard  countries  were 
naturally  comparatively  constant,  the  normal  range  being 
determined  by  the  "  silver  points,"  the  counterparts 
of  the  "  gold  points  "  in  exchange  between  gold  standard 
countries.  But  the  great  bulk  of  India's  foreign  trade 
was  with  gold  standard  countries.  This  trade  was  subject 
to  all  the  evils  of  an  unstable  and  widely  varying  exchange. 
For  the  year  1891-92  India's  total  merchandise  imports 
and  exports  (exclusive  of  treasure  and  government  stores) 
amounted  to  R.  1,746  millions,  of  which  74  per  cent  was  with 
gold  standard  countries  and  26  per  cent  with  silver  standard 
countries.  For  1890-91  the  percentages  were  73  and  27 
respectively.1  The  average  annual  amounts  and  the  per- 
centages of  India's  total  merchandise  exports  going  to  gold- 
using  and  silver-using  countries  respectively  for  the  period 
1875-76  to  1891-92  were  as  follows : 2 


GOLD-USING  COUNTRIES 

SILVER-USING  COUNTRIES 

Per  Cent 

Av.  Ann.  Amt. 
R.  000,000 

Per  Cent 

Av.  Ann.  Amt. 
R.  000,000 

1875-76  to  1879-80 

62 

389 

38 

235 

i  880-81  to  1884-85 

69 

564 

31 

258 

1885-86  to  1889-90 

68 

632 

32 

294 

1890-91  to  1891-92 

67 

702 

33 

339 

During  the  later  years,  it  will  be  observed,  the  amount 
of  export  trade  both  to  gold  standard  countries  and  to 


1  Herschell  Com.  Rep.,  App.  II,  p.  243. 


2  Ibid.,  p.  242. 


24  MODERN  CURRENCY  REFORMS 

silver  standard  countries  was  increasing  but  the  proportions 
were  not  materially  changing.1 

Declining  Exchange  and  India's  Export  Trade.  There 
was  a  widespread,  though  not  uncontroverted,  opinion 
that  the  decline  in  exchange  rates  was  stimulating 
the  export  trade  with  gold  standard  countries.  India's 
exports  to  gold  standard  countries  were  largely  raw  prod- 
ucts, the  chief  of  which  were  cotton,  rice,  seeds,  wheat, 
jute,  tea,  and  indigo.2  The  gold  prices  of  some  of  these 
articles,  as,  for  example,  rice,  jute,  and  indigo,  had  not  fallen 
from  1873  to  *892  as  rapidly  nor  proportionately  to  the 
fall  in  the  gold  value  of  the  rupee,3  and  the  result  was  that 
Indian  exporters  obtained  increasing  numbers  of  rupees  for 
their  bills  of  exchange  drawn  against  given  quantities  of 
these  articles  exported.  Inasmuch  as  local  wages,  and  local 
prices  of  supplies  during  the  greater  part  of  the  period 
1873-93,  nad  been  fairly  constant,  the  production  costs 
of  these  commodities  had  not  materially  increased.  The 
result  was  that  certain  lines  of  trade  were  artificially 
stimulated  by  the  declining  exchange 4  —  a  subject  to  be 
discussed  in  some  detail  later  in  this  volume.5 

1  Figures  for  imports  from  gold  standard  countries  and  from  silver  stand- 
ard countries  respectively  are  not  available  for  the  above  period.    During 
each  of  the  two  years  1890-91  and  1891-92  the  merchandise  imports  from 
silver  standard  countries  were  about  one  third  of  the  merchandise  exports  to 
silver  standard  countries.    The  chief  silver  standard  country  with  which 
India  traded  was  China,  and  this  trade  was  triangular,  England  represent- 
ing the  third  point.    "China  consigns  a  large  portion  of  her  produce  to 
England,  and  the  proceeds  are  remitted  back  to  India  in  discharge  of  the  in- 
debtedness of  China  to  India."    Ibid.,  Q.  2566,  also  pp.  242-243. 

2  Cf .  Statistical  Abstract  relating  to  British  India,  1888-89  to  1897-98, 
London,  1899,  p.  229. 

3  Cf.  Fowler  Com.  Rep.,  App.  II.,  pp.  144  and  160. 

4  The  most  striking  illustration  of  this  principle  which  the  writer  has  seen 
is  the  one  cited  by  Mr.  Moreton  Frewen  from  the  experience  of  Hakodate, 
the  great  northern  island  of  Japan.    It  was  reported  to  the  British  Foreign 
Office  by  the  British  Consul  General  at  Hakodate.    "In  1892,  Hakodate 
advertised  for  tenders  for  1,500  tons  of  water-pipes  and  the  contract  was 

5  Cf.  infra,  pp.  4Q2-495- 


HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT    25 

An  illustration  of  the  principle  is  found  in  the  Ceylon 
tea  industry  down  to  about  1891.  In  Ceylon  the  Indian 
rupee  circulated  as  in  India,  and  tea  was  Ceylon's  chief 
article  of  export.  From  1880  to  1885  the  gold  price  of 
Ceylon  tea  in  England  steadily  rose,  while  the  gold  value  of 
the  rupee  declined  slightly,  with  the  result  that  Ceylon  tea 
dealers  received  increasing  amounts  of  gold  for  each  pound 
of  tea  and  increasing  numbers  of  rupees  for  each  sovereign 
obtained  for  the  tea.  After  1885  the  gold  price  of  tea  in 
London  declined,  but  not  so  rapidly  as  the  gold  price  of 
the  rupee.1  The  result  was  that  the  tea  merchants  and 
producers  were  receiving  increasing  rupee  prices  for  their  tea. 
Wages  and  other  expenses  of  tea  production  in  Ceylon 
were  nearly  constant.  Were  India  and  Ceylon  to  go  to  a 
gold  standard,  it  was  claimed,  they  would  lose  this  advan- 
tage, and  be  handicapped  in  their  competition  with  silver 
standard  countries  like  China  and  Japan  for  the  sale  of 
tea  in  the  markets  of  gold  standard  countries.2 

The  weight  of  opinion  among  merchants  familiar  with 

secured  by  a  British  firm,  the  tender  being  four  guineas  a  ton.  .  .  . 
At  the  price  of  silver  four  guineas  cost  Hakodate  28  silver  dollars.  In  1893 
there  came  the  greatest  fall  in  the  price  of  silver,  the  fall  of  last  year  [1908] 
only  excepted.  In  1894,  Hakodate  again  advertised  for  1,500  tons  of  pipes 
to  complete  her  water  system.  The  same  English  firm  tendered,  and  this 
time  at  four  sovereigns  per  ton.  But  because  of  the  great  fall  in  exchange 
it  now  required  $40  [silver]  to  buy  four  sovereigns,  or  in  other  words,  it 
required  40  per  cent  more  of  Hakodate's  silver  money  to  buy  5  per  cent 
less  of  our  gold  money.  Under  these  altered  conditions  Hakodate  refused  all 
the  tenders ;  she  erected  her  own  iron  works,  and  when  last  heard  from  was 
busy  exporting  her  pipes  to  China  and  India."  Moreton  Frewen,  Silver 
and  our  Trade  with  Asia,  an  address  published  by  the  Canadian  Branch  of 
the  Fair  Exchange  League,  Ottawa,  Canada,  P.  O.  Box  393. 

1  For  the  entire  period  1880-92  the  gold  price  of  Ceylon  tea  fell  9^  per 
cent  while  sterling  exchange  rates  fell  24^  per  cent.    There  was  a  substantial 
drop  in  the  gold  price  of  tea  1892-94. 

2  Cf .  testimony  of  H.  K.  Rutherford,  Chairman  of  the  Ceylon  Tea  Planta- 
tions Company,  before  the  Herschell  Committee ;  also  letter  of  Thomas  North 
Christie;   and  figures  and  chart.    Herschell  Com.  Rep.,  pp.  100-113  and 
App.  H,  pp.  221-223. 


26  MODERN  CURRENCY  REFORMS 

the  Indian  export  trade  was  strongly  in  support  of  the  claim 
that  the  declining  exchange  had  stimulated  Indian  exports. 
One  of  the  most  capable  witnesses  before  the  Herschell 
Committee,  Mr.  Stephen  A.  Ralli  of  the  firm  of  Messrs.  Ralli 
Brothers,  which  had  carried  on  a  large  import  and  export 
trade  with  India,  declared  in  answer  to  the  question: 
"Do  you  think  that  the  decline  in  silver  has  increased  pro- 
duction in  India ?"  "I  do  not  think  there  can  be  two 
opinions  upon  that  point ;  that  is  an  evident  thing.  No 
man  who  has  any  practical  experience  of  India  and  of  the 
export  trade,  of  the  business  in  the  interior,  can  have  any 
doubt  whatever  that  the  decline  in  silver  and  the  decline 
in  exchange  have  materially  conduced  to  the  great  devel- 
opment of  the  export  trade."  1 

Unfortunately,  data  are  not  available  that  are  both  suf- 
ficiently comprehensive  in  scope  and  extensive  in  time, 
during  the  period  of  India's  silver  standard,  to  afford  for 
India  a  satisfactory  test  of  this  claim.2 

Even  if  declining  exchange  did  stimulate  somewhat 
India's  export  trade  in  certain  commodities,  this  did  not 
mean  that  in  its  final  result  the  stimulus  to  the  export  trade 
was  necessarily  a  good  thing  for  India.  At  best  it  was  but 
temporary  and  irregular  in  its  action.  Furthermore,  if 
falling  exchange  stimulated  exports,  it  probably  also  in- 
hibited imports,3  as  the  rupee  was  having  a  continually  de- 
creasing purchasing  power  over  gold  while  rupee  wages  in 
India  were  remaining  fairly  constant,4  and  the  gold  prices 
of  many  commodities  which  were  being  imported  from  gold 

1  Herschell  Com.  Rep.,  Evidence,  Q.  1499. 

2  It  is  interesting  to  note  that  the  Japanese  Coinage  Investigation  Com- 
mission in  its  Report  of  1896  maintained  that  falling  exchange  rates  increase 
exports  in  silver  standard  countries;  and  that  the  Mexican  Monetary  Com- 
mission in  its  report  of  seven  years  later,  after  a  careful  study,  came  to  the 
same  conclusion  for  Mexico.     Cf.  Matsukata  Masayoshi,  Report  on  the 
Adoption  of  the  Gold  Standard  in  Japan,  Tokyo,  1899,  p.  162.     For  a  dis- 
cussion of  the  subject  in  connection  with  Mexico  see  infra,  pp.  492-495. 

3  For  a  discussion  of  this  subject  see  infra,  pp.  495-496. 

4  Cf.  Herschell  Com.  Rep.,  App.  II,  p.  272. 


HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT    27 

standard  countries  were  not  falling  proportionally  to  the 
gold  price  of  silver  and  to  the  rise  in  Indian  exchange.  The 
Herschell  Committee,  therefore,  in  considering  the  immedi- 
ate stimulus  of  the  declining  exchange  to  the  export 
trade,  was  doubtless  correct  in  maintaining  that  any 
such  tendency,  if  it  existed,  was  not  to  be  given  much 
weight  in  formulating  a  permanent  monetary  program  for 
India.1 

In  justice  to  the  advocates  of  a  continuance  of  the  silver 
standard  in  India,  however,  it  must  be  admitted  that  during 
the  period  just  prior  to  the  Herschell  Committee  report, 
India's  import  trade  with  gold  standard  countries  suffered 
less  from  the  falling  exchange  than  would  normally  be  the 
case,  and  less  than  other  silver  standard  countries  suffered 
a  few  years  later  when  silver  experienced  its  pronounced 
decline  in  value  not  only  as  compared  with  gold  but  also 
as  compared  with  commodities  in  general.  This  was 
true  because  the  gold  prices  of  many  of  the  chief  com- 
modities which  India  was  importing  fell  rapidly  between 
1873  and  1893  —  so  rapidly  that  in  many  instances  there 
was  little  or  no  increase  in  rupee  prices.  For  example, 
prominent  among  India's  nine  chief  classes  of  imports  in 
1892-93  were  the  following  articles :  cotton  manufactures, 
sugar,  iron,  mineral  oils,  and  copper.2  While  the  sterling 
exchange  value  of  the  rupee  fell  34  per  cent  from  1872-73  to 
1892-93,  the  gold  prices  of  cotton  manufactures  (yarn, 
thread,  and  piece  goods  plain  and  printed)  on  the  average 
fell  31  per  cent ; 3  from  1873  to  1893  the  g°ld  Price  °f  sugar 


1  Herschell  Com.  Rep.,  sees.  27-28. 

2  For  list  of  imports  and  values,  see  Statistical  Tables  for  East  India,  1899, 
p.  229. 

3  Cotton  yarn  fell  47  per  cent,  cotton  thread  rose  2  per  cent,  cotton  piece 
goods  (plain)  fell  39  per  cent,  and  printed  and  dyed  also  39  per  cent,  giving 
an  average  of  31  per  cent.     Eliminating  the  thread,  the  average  of  the  other 
three  items  was  42  per  cent.     Computations  are  based  upon  wholesale 
export  values  as  given  in  the  British  Board  of  Trade's  Price  Tables,  in  House 
of  Commons  Sessional  Papers,  1903,  vol.  68,  pp.  46-49  and  notes. 


28  MODERN  CURRENCY  REFORMS 

(Java)  fell  38  per  cent ; *  that  of  iron  bar  fell  60  per  cent ; 2 
that  of  petroleum  fell  74  per  cent ; 3  and  that  of  copper  fell 
53  per  cent.4  Omitting  manufactured  silk,  for  which  no 
figures  are  available,  the  average  decline  for  the  eight 
groups  of  commodities  mentioned  above,  representing  60 
per  cent  of  the  total  merchandise  imported  by  sea  (ex- 
clusive of  government  supplies),  was  46  per  cent,  or  12  per 
cent  greater  than  the  decline  in  the  gold  exchange  value  of 
the  rupee. 

In  general,  therefore,  it  may  be  said  that  the  gold  prices 
of  the  chief  commodities  India  was  buying  were  declining 
more  rapidly  than  the  gold  value  of  the  rupee  and  that 
India  was  probably  actually  receiving  from  Europe  larger 
quantities  of  these  goods  on  the  average  per  rupee  as  well 
as  per  sovereign  than  she  was  in  187 2-73. 5 

The  actual  development  of  the  merchandise  import  and 
export  trade  therefore  during  the  twenty  years  prior  to  the 
Herschell  Committee's  Report  had  hardly  been  such  as  to 
justify  a  strong  condemnation  of  the  silver  standard. 

Temporary  Oscillations  in  Exchange.  Aside  from  the 
broad  influence  of  the  decline  in  exchange  upon  India's 
foreign  trade  with  gold  standard  countries,  there  was 

1  Sauerbeck  index  numbers.     Jour.  Roy.  Stat.  Soc.,  XLIX,  1886,  pp. 
642-647,  and  LXVI,  1903,  pp.  97-102. 

2  Sauerbeck  index  numbers. 

3  Ibid. 

4  The  other  four  items  were  "cotton  twist  and  yarn,"  "railway  plant  and 
rolling  stock,"  "machinery  and   mill  work,"  and  "silk   manufactures." 
Cotton  yarn,  which  I  have  included  in  the  first  nine  items,  fell  47  per  cent. 
There  are  no  general  price  figures  for  such  goods  as  railway  plant  and  rolling 
stock,  machinery  and  mill  work,  and  provisions.     But  the  figures  given  by 
the  Board  of  Trade  for  manufactured  iron  (Report,  op.  cit.,  pp.  23,  26,  and 
27),  which  roughly  speaking  may  be  taken  to  typify  the  first  two  groups,  show 
an  average  decline  from  1872  to  1892  of  45  per  cent,  while  the  Board's  index 
numbers  for  the  group  "food  and  drink"  which  in  a  rough  way  may  be  taken 
to  typify  "provisions"  fell  21  per  cent  (ibid.,  p.  xxxiv).     Neither  the  Sauer- 
beck nor  the  Board  of  Trade  tables  give  figures  for  silk  manufactures. 

6  For  a  discussion  of  the  general  principles  governing  the  influence  of 
changes  in  the  value  per  se  of  the  monetary  standard  on  the  prices  of 
various  classes  of  goods,  see  Kemmerer,  Money  and  Prices,  pp.  50-53. 


HERSCHELL  COMMITTEE  INVESTIGATION  AND   REPORT    2Q 

another  influence  which,  though  part  of  the  same  thing, 
was  sometimes  considered  separately,  i.e.  the  temporary 
oscillations  of  exchange.  These  brought  an  element 
of  uncertainty  in  foreign  trade  transactions  which  often 
tended  to  transform  them  into  a  species  of  gambling.  A 
glance  at  the  chart  on  page  50  will  show  how  unstable 
exchange  was  during  the  years  1889-93,  when  variations  of 
2  to  4  per  cent  a  month  were  not  uncommon.  The  risks 
and  losses  normally  incident  to  such  fluctuations,  however, 
could  largely  be  eliminated,  though  at  a  small  expense,  by 
various  devices  in  common  use  among  the  large  trading 
houses,  devices  such  as  the  making  of  forward  contracts 
with  the  exchange  banks  for  the  purchase  or  sale  of  ex- 
change at  rates  fixed  months  in  advance,1  and  "hedging" 
through  the  forward  purchase  or  sale  of  silver  on  the  London 
market  so  that  a  loss  on  exchange  would  be  compensated  by 
a  profit  on  the  silver  transaction  and  vice  versa. 

///.   Hardships  Caused  to  Europeans  in  India  by  the  Fall 
in  Exchange 

Another  difficulty,  analogous  to  the  Government's  fiscal 
difficulties  and  one  which  seemed  likely  to  increase  them  in 
the  future,  was  the  burden  which  the  falling  exchange  im- 
posed on.  English  officials  and  employees  and  upon  European 
employees  in  commercial  houses,  who  were  receiving  their 
wages  in  rupees  but  remitting  substantial  parts  of  them  home 
either  as  savings  or  contributions  to  their  families.  The 
fact  that  silver  prices  and  wages  in  India  had  been  fairly 
constant  (except  for  famine  periods)  meant  that  the  declin- 
ing gold  value  of  the  rupee  did  not  result  in  much  hardship 
to  these  persons  as  regards  local  prices  and  expenses,  but 
the  fact  that  100  rupees  in  1892-93  would  buy  about  34  per 
cent  less  sovereigns  than  twenty  years  before  was  looked 
upon  as  a  real  hardship  as  regards  sending  money  home. 

1  Cf.  infra,  pp.  297-299,  also  Herschell  Com.  Rep.,  App.  II,  pp.  227-228. 


30  MODERN   CURRENCY  REFORMS 

It  is  true  that  home  prices  had  fallen  on  the  aver- 
age more  than  proportionately,  but  this  fact  was  not 
generally  realized  by  the  persons  concerned,  and  it  often 
happened  that  there  had  not  been  much  of  a  decline  in  the 
prices  of  those  kinds  of  things  in  which  these  officials  and 
employees  were  putting  many  of  their  sovereigns,  such  for 
example  as  house  rents,  real  estate,  the  paying  off  of  mort- 
gage indebtedness,  and  the  like.  Commenting  on  this  sub- 
ject the  Herschell  Committee  said : 

"It  is  a  matter  of  dispute  how  far  the  fall  of  prices  in 
this  country  [England]  compensates  for  the  smaller  sterling 
remittance  which  the  same  number  of  rupees  will  procure ; 
but  it  is  certain  that,  when  due  allowance  has  been  made  for 
this,  the  purchasing  power  of  the  incomes  of  Indian  officials 
has  been  largely  reduced. 

"It  appears  that  some  European  employers  have  felt 
themselves  bound  to  make  an  allowance  to  the  Europeans 
in  their  service  in  India,  sufficient  to  counterbalance,  to 
some  extent,  the  loss  which  they  experience  owing  to  the 
fall  of  the  rupee ; l  and  there  can  be  little  doubt  that,  even  in 
existing  circumstances,  and  still  more  if  the  fall  of  exchange 
continues,  the  Government  of  India  cannot  turn  a  deaf  ear 
to  the  appeals  of  their  servants  for  similar  treatment,  with- 
out the  danger  of  engendering  serious  discontent,  apart 
from  the  question  whether  such  appeals  are  just  and  reason- 
able." 2 

Such  were  the  main  points  in  the  Indian  currency  situa- 
tion confronting  the  British  Government  in  1892.  Among 
them  it  viewed  as  by  far  the  most  serious  the  fiscal  burdens 
which  the  falling  exchange  was  imposing  upon  the  Indian 
Government  and  the  prospect  that  they  would  be  greatly 
increased  in  the  future.  This  phase  of  the  situation  was 
made  more  serious  by  the  fact  that  no  satisfactory  way  could 
be  seen  by  which  to  increase  the  Indian  revenues. 

1  For  a  description  of  such  a  plan  see  infra,  p.  262,  note 2. 

2  Herschell  Com.  Rep.,  sees.  17  and  18. 


HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT    31 

Obstacles  to  ihe  Increase  of  Government  Revenues 

To  increase  the  import  duties  would  cause  a  storm  of 
protest  at  home.  By  far  the  largest  item  of  India's  imports 
from  England  was  cotton  manufactures,  but  these  were 
actually  falling  off  at  this  time  (1890-91  to  1892-93),  much 
to  the  distress  of  Manchester  manufacturers  and  merchants ; 
and  India  was  not  only  increasing  her  own  manufactures  of 
cotton  goods  for  home  use,  but  was  going  into  the  export 
market  and  even  competing  with  Manchester  for  certain 
types  of  trade.  To  have  further  handicapped  Manchester 
by  an  import  duty  on  manufactured  cotton,1  or  by  an  export 
duty  on  raw  cotton  —  India's  chief  item  of  export  —  would 
have  been  the  straw  that  would  break  the  camel's  back  for 
Manchester  and  a  serious  political  blunder  for  the  dominant 
political  party  in  England.  On  the  other  hand,  many  of 
India's  internal  taxes  were  burdensome  and  extremely  un- 
popular, such  as  the  income  tax  and  the  salt  tax ;  and,  in 
the  existing  strained  state  of  Indian  public  opinion  towards 
England,  an  increase  or  extension  of  these  taxes  would  have 
threatened  increasing  discontent  and  even  revolutionary 
uprisings.  The  largest  single  source  of  government  revenue 
for  India  was  land,  but  this  was  essentially  a  contractual 
source  of  revenue  and  could  not  be  readily  increased  except 
at  certain  periodic  settlement  dates.  Sir  Charles  Edward 
Bernard,  who  had  been  Secretary  to  the  Government  of 
India  in  the  revenue  and  financial  departments,  and  was  at 
the  time  Secretary  of  the  Revenue  and  Statistics  Depart- 
ment of  the  India  Office,  testified  before  the  Herschell 
Committee  that  nearly  one  fourth  of  India's  land  revenue 
had  been  permanently  settled  by  engagement  with  the 
Government  made  nearly  a  hundred  years  ago,  and  could 
not  be  touched,  and  that  "the  rest  of  the  land  revenue  is 
settled  for  long  periods  of  30  years,  and  over  a  great  part  of 
the  country  the  30  years'  settlement  has  recently  been 

1  Cf.  ibid.,  sec.  39. 


32  MODERN  CURRENCY  REFORMS 

made." *  Considering  in  this  way  various  suggested 
methods  of  increasing  revenue,  the  Indian  Government 
found  none  that  afforded  a  solution  of  the  difficulty,  should 
exchange  continue  to  fall  as  it  offered  every  prospect  of 
doing.2 

To  meet  the  difficulty  by  a  reduction  of  expenditures 
likewise  seemed  hopeless.  On  this  point  the  Herschell 
Committee  said:  " Although  ...  we  feel  strongly  the 
necessity  for  the  utmost  care  in  restricting  expenditure, 
we  are  certainly  not  in  a  position  to  conclude  that  any 
economies  are  possible  which  would  enable  the  Indian 
Government  to  meet  successfully  the  great  and  growing 
deficit  caused  by  falling  exchange."  3 

Herschell  Committee  Accepts  with  Some  Modifications  Pro- 
posals of  Indian  Government 

The  Herschell  Committee  in  its  report  accepted  the  plan 
of  the  Indian  Government  for  the  closing  of  the  mint  to 
the  free  coinage  of  silver,  and  for  the  ultimate  adoption  of 
the  gold  standard,  with  two  modifications,  (i)  The  closing 
of  the  mints  to  the  free  coinage  of  silver  should  be  accom- 
panied by  an  announcement  that,  though  closed  to  the 
public,  they  would  be  used  by  the  Government  for  the 
coinage  of  rupees  in  exchange  for  gold  at  the  rate  of  i6d.  to 
the  rupee.4  This  i6d.  rate  was  not  thought  of  by  the  Com- 
mittee as  necessarily  a  permanent  one,  but  rather  as  purely 
tentative,  since  "  circumstances  might  arise  rendering  it 
proper  and  even  necessary  to  raise  the  ratio;  and  the 
Indian  Government  might  be  empowered  to  alter  it  with 

\ 

1  Herschell  Com.  Rep.,  Evidence,  Qs.  3160-3255,  especially  3212. 

2  Ibid.,  sees.  35-44. 

8  Herschell  Com.  Rep.,  sec.  45. 

4  Ibid.,  sees.  150  and  151.  The  Government  of  India  in  their  telegram  of 
January  22,  1893,  had  proposed  that  they  be  given  authority  to  declare  Eng- 
lish gold  coins  legal  tender  in  India  at  a  rate  not  higher  than  iSd.  per  rupee. 
Herschell  Com.  Rep.,  App.  I,  p.  183. 


HERSCHELL  COMMITTEE  INVESTIGATION  AND  REPORT    33 

the  sanction  of  the  Secretary  of  State."  l  Many  expected 
that  the  closing  of  the  mint  would  lead  to  a  sudden  rise  in 
exchange  and  the  rate  might  go  beyond  the  i6d.  par  —  a 
rate  that  had  been  equalled  as  late  as  January  and  February 
1892.  It  was  to  avoid  such  a  contingency,  to  prevent  the 
currency  supply  from  being  entirely  unautomatic  and  to 
lighten  the  blow  which  the  closing  of  the  mints  to  free 
coinage  would  give  to  the  price  of  silver,  that  the  Committee 
recommended  the  modification  of  Sir  David  B arbour's  plan 
permitting  the  Indian  Government  to  issue  rupees  in 
exchange  for  gold  at  the  i6d.  rate.2  (2)  The  other  modi- 
fication was  in  the  nature  of  an  additional  provision  that  at 
the  government  treasuries  gold  would  be  received  in  pay- 
ment of  public  dues  at  the  same  rate.  Its  object  likewise 
was  to  prevent  disturbances  and  inconveniences  that  might 
arise  from  a  sudden  advance  in  exchange  and  scarcity  of 
rupees. 

Two  members  of  the  Committee  (T.  H.  Farrer  and  R.  E. 
Welby)  signed  a  supplementary  note,  to  the  effect  that  in- 
asmuch as  the  Committee's  proposal  contemplated  the 
ultimate  adoption  of  the  gold  standard  with  gold  in  circula- 
tion, the  Government  of  India  should  begin  to  accumulate 
a  gold  reserve  so  as  to  be  prepared  to  secure  the  converti- 
bility of  the  silver  coins.3 

The  Committee's  report  recommended  that  a  rather  free 
hand  be  given  to  the  Indian  Government  in  consultation 
with  the  Secretary  of  State  as  to  the  details  of  the  reform 
plan  and  the  time  of  its  inauguration.4 

Herschell  Committee's  Recommendations  Adopted 

The  Herschell  Committee's  Report  was  submitted  to  the 
Secretary  of  State  for  India  May  31,  1893,  and  on  June  2,  a 
copy  of  the  Report  was  mailed  to  the  Viceroy  of  India. 

1  Herschell  Com.  Rep.,  sec.  151.  » Ibid.,  pp.  41  and  42. 

*  Ibid.,  sec.  150.  4  Ibid.,  sec.  157. 

D 


34  MODERN  CURRENCY  REFORMS 

Five  days  later  a  summary  of  the  recommendations  was 
cabled  to  the  Viceroy.1  On  June  15  the  Viceroy  cabled  the 
Secretary  of  State  that  the  draft  of  the  Herschell  Com- 
mittee's Report  had  been  received  and  considered  by  the 
Indian  Government  and  met  their  approval.  He  requested 
authority  to  put  the  plan  into  effect  at  once  without  further 
discussion,  since  " suspense  would  be  injurious,"2  and  it 
was  not  likely  that  any  further  information  comparable 
with  that  already  before  the  Secretary  of  State  would  be 
forthcoming  from  India.  In  response  to  this  telegram  the 
Secretary  of  State  telegraphed  the  Viceroy  June  20:  "Her 
Majesty's  Government  have  decided  to  approve  the  pro- 
posals of  your  Government  to  close  the  mints  to  free  coinage 
and  to  make  arrangements  for  the  adoption  of  a  gold 
standard,  subject  to  the  recommendations  made  by  Lord 
Herschell's  Committee  which  your  Government  have 
accepted.  You  are  therefore  empowered  forthwith  to  take 
the  necessary  steps."  3 

1  Correspondence  between  the  Government  of  India  and  the  Secretary  of 
State,  London,  1893,  Cd.  7060-7061,  p.  14. 

2  Ibid.,  pp.  14  and  15. 

3  Ibid.,  p.  15. 


CHAPTER  III 

RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE 

Indian  Mints  Closed  to  the  Free  Coinage  of  Silver 

THE  Indian  Government  having  secured  this  authority 
was  not  slow  in  acting.  On  June  26  it  passed  Act  Number 
VIII  of  1893  to  amend  the  Indian  Coinage  Act  of  1870,  and 
the  Indian  Paper  Currency  Act  of  1882. 1  The  Coinage  Act 
of  1893  provided  for  the  immediate  closing  of  the  Indian 
mints  to  the  free  coinage  of  silver  with  the  proviso  that  the 
Indian  Government  should  retain  power  to  coin  silver  on  its 
own  account.  Three  administrative  Notifications2  were 
issued  on  the  same  date :  the  first  provided  for  giving 
rupees  in  exchange  for  gold  presented  at  the  Indian  mints, 
at  the  rate  of  i6d.  to  the  rupee;  the  second  authorized  the 
receipt  of  sovereigns  and  half  sovereigns  by  the  Govern- 
ment in  payment  of  taxes  and  other  government  dues  at  the 
same  rate ;  and  the  third  provided  for  the  issue  of  currency- 
notes  in  exchange  for  British  coin  or  gold  bullion  at  the 
corresponding  rate. 

In  recommending  i6d.  as  a  tentative  rate  the  Herschell 
Committee  contemplated  little  more  than  a  recognition 
of  the  approximate  gold  value  of  the  rupee  as  it  had  existed 
during  the  preceding  year  or  two ;  the  plan  proposed  was 
not  intended  to  raise  the  normal  gold  value  of  the  rupee,  but 
to  prevent  it  from  declining  further,  and  ultimately  to  stabi- 

1  The  Indian  Coinage  and  Mint  Act  as  amended  in  1893  is  reprinted  in 
full  in  L.  C.  Probyn,  Indian  Coinage  and  Currency,  pp.  96-110. 
8  Notifications  are  reprinted  in  full  in  Probyn,  pp.  111-112. 

35 


36  MODERN  CURRENCY  REFORMS 

lize  it.  In  their  supplementary  memorandum  Messrs. 
Farrer  and  Welby  of  the  Herschell  Committee  said : 

" .  .  .  It  is  to  be  observed  that  the  step  which  we  recom- 
mend will  produce  the  least  possible  immediate  change. 
Its  object  is  not  so  much  to  raise  the  gold  value  of  the  rupee, 
as  to  prevent  a  further  fall.  It  does  not  materially  alter 
the  present  relations  between  debtor  and  creditor,  but,  on 
the  contrary,  prevents  those  relations  being  altered  in  the 
future  by  a  further  fall."  1 

A  glance  at  the  chart  on  page  50  will  show  that  during 
the  two  years  preceding  the  closing  of  the  Indian  mints, 
i.e.  from  July  1891  to  June  1893,  the  sterling  value  of  the 
rupee  ranged  from  lyfd.  (July  1891)  to  14.3^.  (March 
1893),  the  mean  being  almost  exactly  i6d.  The  average 
monthly  rates  of  exchange  for  "council  bills"2  (i.e.,  the 

1  Herschell  Com.  Rep.,  p.  40,  sec.  6. 

2  Indian  Council  Bills.     Council  bills  play  a  very  important  r61e  in  India's 
fiscal,  monetary,  and  commercial  life.    They  are  bills  on  governmental  funds 
in  India  sold  in  London  by  the  Secretary  of  State  in  Council  on  Wednesday 
normally  of  each  week  to  the  highest  bidders,  provided  the  bids  do  not  fall 
below  a  certain  declared  minimum.     On  each  Wednesday  the  Secretary  of 
State  has  posted  at  the  Bank  of  England  a  notice  inviting  tenders  to  be  sub- 
mitted on  the  following  Wednesday  for  bills  of  exchange  and  telegraphic 
transfers  on  the  government  of  Madras  and  the  government  of  Bombay. 
The  notice  fixes  a  limit  beyond  which  the  total  allotments  must  not  go. 
The  Secretary  of  State  does  not  obligate  himself  to  allot  the  total  amount 
mentioned  in  the  notice.    On  the  other  hand,  when  the  total  amount  ten- 
dered for  exceeds  the  amount  offered  at  the  accepted  rates  allotments  are 
made  pro  rata.     During  the  period  from  one  Wednesday  to  the  next  what 
are  known  as  "intermediates"  or  "specials"  may  be  sold  on  the  basis  of  a 
certain  agio  over  the  lowest  rate  at  which  allotments  had  been  made  on  the 
preceding  Wednesday.    The  chief  object  of  these  bills  is  to  provide  a  means 
of  remitting  from  India  to  London  the  funds  needed  to  meet  India's  home 
charges.    Often,  however,  bills  are  sold  by  the  Secretary  of  State  for  other 
purposes,  such  as  to  provide  additional  facilities  for  English  importers  having 
remittances  to  make  to  India,  or  to  transfer  funds  for  monetary  as  distin- 
guished from  fiscal  purposes  of  the  Government. 

The  sale  of  council  bills  may  be  traced  back  to  1834,  although  there  were 
some  fairly  long  periods  in  which  no  bills  were  sold,  notably  the  period  1857- 
1862. 

For  a  full  description  of  council  bills,  their  history,  and  their  functioning, 
see  Memorandum  on  the  Sale  of  Council  Bills  and  Telegraphic  Transfers  sub- 


RAISING   THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE     37 

averages  for  the  high  and  low  rates  for  each  month)  for 
the  two-year  period,  June  1891  to  May  1893  inclusive, 
was  isffd.  and  the  average  for  the  two  and  a  half  year 
period,  December  1890  to  May  1893  inclusive,  was  16-^d.1 
The  minimum  rate  at  which  tenders  for  council  bills  were 
accepted  for  the  week  ending  June  21,  1893,  (i.e.  the  week 
before  the  week  containing  the  date  on  which  the  mints 
were  closed)  was  i4ff d.  It  is  evident  therefore  that  the 
i6d.  rate,  although  higher  than  the  rates  prevailing  at  the 
time  of  closure,  was  a  fairly  representative  rate,  if  one 
took  a  period  of  two  or  two  and  a  half  years. 

Another  advantage  of  the  i6d.  rate  was  the  ease  with 
which  it  assimilated  the  Indian  currency  system  to  that  of 
England.  At  i6d.  there  would  be  exactly  15  rupees  to  the 
sovereign,  and  this  rate  of  15  to  i  was  the  rate  at  which 
the  gold  mohur  formerly  exchanged  for  rupees.2  The  rupee 
contains  16  subsidiary  units  called  annas,  therefore  one 
anna  would  become  equivalent  to  one  penny.  The  anna 
is  equivalent  to  4  pice,  which  would  give  the  pice  and  the 
farthing  the  same  value ;  and  finally,  the  Indian  pice  was 
equivalent  to  three  pie,  making  the  pie  equal  to  one  third  of 
a  farthing.  When  one  considers  the  close  fiscal  and  com- 
mercial ties  existing  between  India  and  the  mother  country 
and  the  prospect  at  the  time  that  the  sovereign  would 
soon  become  an  important  coin  in  India's  monetary  system, 
this  close  assimilation  of  the  sovereign  and  the  rupee  units 
and  their  fractions  will  be  seen  to  be  a  meritorious  feature 
of  the  i6d.  rate. 

mitted  to  the  Royal  Commission  on  Indian  Finance  by  F.  W.  Newmarch, 
Financial  Secretary  for  India.  Royal  Commission  on  Indian  Finance  and 
Currency,  1914,  (Cd.  7070),  pp.  217-233. 

1  Figures  were  computed  from  the  table  of  exchange  rates  given  in  the 
Herschell  Com.  Rep.,  App.  II,  p.  254 ;  and  from  Fowler  Com.  Rep.,  App.  II, 
chart  facing  p.  146. 

*  Cf .  supra,  p.  6. 


38  MODERN  CURRENCY  REFORMS 

How  the  Plan  Worked 

Fall  in  Price  of  Silver.  One  of  the  first  results  of  the 
closing  of  the  Indian  mints  —  a  result  that  was  somewhat 
discounted  in  advance  —  was  a  striking  fall  in  the  price 
of  silver.  This  is  shown  graphically  in  the  chart  on 
page  50.  During  the  month  of  June  1893,  silver  in 
London  fell  from  a  high  point  of  38^.  an  ounce  to  a  low 
one  of  3ojd.  Silver  was  quoted  in  London  at  tf^d.  on 
June  24,  but  on  that  date  rumors  became  current  in 
London  and  New  York  that  India  contemplated  closing 
her  mints;  and  the  white  metal  began  a  rapid  decline, 
reaching  36^.  on  the  26th  when  the  definite  announcement 
of  India's  action  was  made,  and  3o|d.  on  the  3oth.  But 
India's  action  was  not  the  sole  cause  of  this  decline,  al- 
though her  coinage  of  silver  for  the  fiscal  year  1892-93  had 
been  equivalent  to  31  per  cent  of  the  world's  total  silver 
production  for  the  calendar  year  1892,  and  although  the 
psychological  effect,  upon  a  highly  sensitive  market  like  that 
of  silver,  of  closing  the  Indian  mints  which  had  offered  for 
years  an  unlimited  demand  for  silver  at  a  fixed  rupee 
price,  was  undoubtedly  great.1  The  silver  situation  at  this 
tune  had  become  serious  in  the  United  States  as  the  result 
of  the  heavy  silver  accumulations  in  the  Treasury,  and  of 
the  inflation  of  the  currency,  arising  from  the  requirement  of 
the  Sherman  Silver  Purchase  Act  of  1890  that  the  Secretary 
of  the  Treasury  should  buy  4,500,000  ounces  of  silver  every 
month,  and  pay  for  the  same  by  the  issue  of  "treasury 
notes."  The  panic  of  1893  in  the  United  States  was  in  full 
swing  during  June,  and  there  was  a  strong  movement  on 
foot  for  the  repeal  of  this  silver  purchase  clause,  which  was 
widely  looked  upon  as  the  chief  cause  of  the  panic.  The 
silver  market  naturally  asked  what  would  happen  to  silver 
if  on  top  of  India's  action  the  United  States  should  suddenly 

1  Cf.  E.  W.  Kemmerer,  The  Rise  in  the  Price  of  Silver,  etc.,  in  Quart. 
Jour.  Econ.,  XXVI,  1912,  pp.  219-220. 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE     39 

discontinue  its  policy  of  purchasing  annually  about  a  third 
of  the  world's  annual  silver  production,  and  should  begin 
to  dump  its  enormous  accumulations  of  silver  bullion  on 
the  market.  Congress  met  in  special  session  August  7, 1893, 
and  after  lengthy  debate  the  purchase  clause  was  repealed 
on  November  i.  The  anticipation  of  such  action  by  the 
United  States,  we  have  seen,1  was  an  important  factor  in 
leading  India  to  close  her  mints.  It  is  also  true  that  the 
closing  of  the  Indian  mints  and  its  depressing  effect  on 
the  price  of  silver  was  repeatedly  urged  as  a  reason  why  the 
United  States  Treasury  in  self-defense  should  discontinue 
its  heavy  purchases  of  the  white  metal.  A  reference  to  the 
chart  on  page  50  will  show  that,  although  there  were 
constant  fluctuations  in  the  price  of  silver  after  the  closing 
of  the  Indian  mints,  the  low  level  then  reached  or  a  lower 
one  prevailed  until  India  found  herself  actually  on  the 
gold  standard. 

Temporary  Rise  in  Exchange  and  Suspension  of  Sale  of 
Council  Bills 

Simultaneously  with  the  closing  of  the  Indian  mints  ster- 
ling exchange  rates  advanced  sharply,  reaching  i6d.,  and 
then  suddenly  declined.  A  brief  explanation  of  the  move- 
ment will  be  of  assistance  in  understanding  the  subsequent 
course  of  exchange. 

Neither  the  Herschell  Committee  nor  the  Indian  Govern- 
ment were  at  all  certain  as  to  what  would  be  the  immedi- 
ate effect  of  the  closing  of  the  mints  on  the  gold  value  of 
the  rupee.  Referring  to  the  Indian  Government's  proposal 
for  the  closing  of  the  mints  and  for  the  making  of  gold 
coins  legal  tender  at  the  rate  of  not  less  than  13  J  rupees  to 
the  sovereign,  the  Herschell  Committee  said : 

"It  is  true  that  those  who  think  that  exchange  would  not 
for  a  considerable  time  rise  at  all,  and  that  even  the  existing 

1  Supra,  p.  12. 


40  MODERN  CURRENCY  REFORMS 

ratio  might  not  be  maintained,  may  be  right  in  their  antic- 
ipations. But  it  must  be  admitted  that  on  such  a  point 
no  one  can  predict  with  certainty;  exchange  might  rise 
suddenly  and  considerably,  unless  the  Government  were  to 
interfere  actively  to  prevent  it ;  and  the  public  would  not 
feel  any  certainty  as  to  the  course  they  would  take."  1 

Sir  David  B arbour,  the  Financial  Member  of  the  Council 
of  the  Viceroy  of  India,  who  more  than  any  other  person 
was  responsible  for  the  reform  plan  adopted,  said  in  intro- 
ducing the  bill  in  the  Legislative  Council : 

"It  may  well  be  asked  whether  it  will  be  possible  for  us 
to  make  the  gold  standard  effective  at  once.  ...  To  this 
question  I  cannot  give  a  confident  answer,  and  I  do  not 
believe  that  it  is  possible  for  anyone  to  do  so.  ...  It  may 
be  that  the  gold  standard  can  be  made  effective  from  the 
first,  although  it  will  not  be  secure  until  there  is  a  consider- 
able amount  of  gold  in  our  treasuries  and  banks.  Or  it  may 
be  that  the  making  of  the  gold  standard  effective  will  in- 
volve a  long  and  arduous  struggle,  and  necessitate  heavy 
sacrifices."  2 

Although  it  cannot  be  said  that  either  the  Herschell  Com- 
mittee's Report  or  the  statements  of  the  Government  of 
India  gave  the  public  any  warrant  for  believing  that  the 
closing  of  the  mints  would  result  in  an  immediate  advance 
in  exchange  to  the  i6d.  par  contemplated,  nevertheless 
many  influential  persons  promptly  came  to  the  conclusion 
that  such  would  be  the  result.  As  soon  as  it  was  known  that 
the  mints  would  be  closed  and  that  the  gold  value  of  the 
rupee  was  to  be  raised  to  a  maximum  of  i6J.,  there  began  a 
heavy  speculation  in  rupee  paper  which  forced  exchange 
up  rapidly ;  and  the  advance  itself  tended  to  confirm  the 
belief  of  those  who  expected  the  immediate  attainment  of 
a  i6d.  rate.  Even  the  Indian  Government  became  con- 
vinced of  the  soundness  of  this  belief,  and,  apparently  ex- 

1  Herschell  Com.  Rep.,  sec.  149. 

2  Cf.  [London]  Economist,  July  29th,  1893,  p.  907. 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE     41 

pecting  the  attainment  of  the  new  gold  par  within  a  few 
months,1  urged  the  Secretary  of  State  for  India  not  to  sell 
his  council  bills  below  a  i6d.  basis.  His  sales  of  bills  below 
that  rate  were  vigorously  protested  by  the  English  Currency 
Association,2  and  by  numerous  business  men  in  Calcutta,3 
Bombay  and  Madras. 

For  the  week  of  June  21,  1893,  just  before  the  mints  were 
closed,  the  minimum  rate  at  which  tenders  for  council  bills 
had  been  accepted  was  i4f|J;  but  the  following  week 
some  tenders  were  actually  made  and  accepted  at  i6d. 
There  being  practically  no  demand  at  this  latter  rate,  and 
the  Secretary  of  State  being  in  need  of  funds  for  home 
charges,  he  accepted  tenders  during  the  week  of  July  5  at 
a  rate  as  low  as  1 $%d.  This  latter  rate  he  attempted  to 
maintain  as  a  minimum,  but  the  result  was  that  practically 
no  sales  were  made.  Later  the  Secretary  announced  that 
the  minimum  rate  had  been  reduced  to  i5id.,  and  some 
cable  transfers  were  sold  by  him  at  that  rate  on  August  i6.4 
This  announcement  called  forth  strong  protest  from  Cal- 
cutta, Bombay,  and  Madras  business  men.6  Despite  the 
reduction,  however,  no  considerable  amounts  of  bills  were 
sold,  and  the  reduction  was  taken  by  many  to  be  equivalent 
to  an  abandonment  of  the  policy  of  maintaining  any  mini- 
mum rate  whatsoever;  for  the  public  had  no  assurance 
that  the  new  rate  in  turn  would  not  be  lowered.  The  result 
was  that  on  January  20,  1894,  the  Secretary  announced 

1  Cf.  telegrams  passing  between  Viceroy  and  Secretary  of  State  on  this 
subject  between  June  30,  1893,  and  August  25.     Cd.  7253  of  1893,  pp.  3-5. 

2  Cf.  [London]  Economist,  Aug.  26,  1893,  p.  1026;   and  [London]  Times, 
July  8,  1893,  p.  7. 

3  The  Calcutta  correspondent  of  the  London  Times  telegraphed  early  in 
July:  "The  course  which  the  Secretary  of  State  has  been  following  in  con- 
nection with  the  sale  of  council  bills  is  causing  general  surprise  and  indigna- 
tion, and  is  considered  quite  incomprehensible.     It  has  severely  shaken 
public  confidence,  which  will  not  be  restored  till  he  announces  that  i6d.  is 
the  minimum  rate,  and  that  it  will  be  adhered  to  in  future.  .  .  ."     Econo- 
mist, July  8,  1893,  pp.  814.     Cf.  also  Cd.  7253  of  1893,  p.  4. 

4  Cf.  Cd.  9376  of  1899,  p.  158.  6  Cf.  Cd.  7253  of  1893,  p.  4. 


42  MODERN  CURRENCY  REFORMS 

his  abandonment  of  the  attempt  to  maintain  "  a  forced  value 
for  his  bills,"  and  the  first  considerable  issue  of  council 
bills  was  made  on  January  31,  when  a  rate  of  i4fd.  was 
obtained.1  The  Secretary  to  the  Government  of  India 
(Legislative  Department)  said  in  the  Financial  Statement 
for  1894-95  : 

"I  think  it  is  now  recognized  that  the  policy  of  refusing 
to  issue  bills  was  a  mistaken  policy,  and  that  it  would  have 
been  better  to  issue  bills  moderately  so  as  to  meet  the  de- 
mands on  the  Home  Treasury.  But  the  circumstances  we 
had  created  were  altogether  new,  and  both  officials  and 
merchants  and  bankers  had  all  to  learn,  by  actual  experi- 
ence, what  new  economic  forces  had  been  called  into  exist- 
ence, and  how  they  affected  the  question  of  the  apprecia- 
tion of  the  rupee." 2 

Largely  as  a  result  of  this  mistaken  policy  of  trying  to 
suspend  by  government  fiat  the  law  of  demand  and  supply, 
the  total  sales  of  council  bills  fell  from  R.  113. 4  millions  for 
the  last  six  months  of  1892  to  R.  11.4  millions  for  the 
corresponding  period  of  i893.3 

This  practical  discontinuance  of  the  sale  of  council  bills 
for  a  period  of  nearly  six  months  had  a  number  of  serious 
results,  the  chief  of  which,  briefly  summarized,  were  as 
follows : 

(i)  Interference  with  Export  Trade.  It  interfered  with 
the  export  trade  at  a  most  inopportune  time.  Any  advance 
in  exchange  rates  in  India,  we  have  seen,4  tends  to  inhibit 
the  export  trade,  by  lessening  the  number  of  rupees  the 
exporter  receives  for  a  given  amount  of  foreign  or  British 
currency.  This  sudden  and  artificial  advance  in  exchange, 
however,  had  a  greater  inhibiting  effect  on  exports  than  a 
normal  advance  would  have  had  because  the  public  were  at 

1  East  India  Financial  Statement  for  1894-95,  p.  12. 

2  Page  12. 

3  Figures  cited  by  Probyn,  p.  68  note. 

4  Cf.  supra,  pp.  24-28. 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF   16  PENCE    43 

sea  as  to  how  the  Government's  currency  scheme  would 
work,  and  were  doubtful  of  the  Secretary  of  State's  ability 
to  hold  exchange  at  the  rate  announced.  This  doubt  in- 
creased as  time  went  on,  and  as  the  Secretary,  finding  it 
practically  impossible  to  sell  bills  at  the  first  minimum 
rate  announced,  was  forced  to  announce  a  second  and 
lower  rate.  Naturally,  exporters  in  India  and  importers  in 
England  held  back  for  more  favorable  rates.  The  Secre- 
tary's ability  to  make  his  minimum  rate  effective  was 
further  weakened  by  the  fact  that  the  currency  reform  had 
been  initiated  at  the  most  unfavorable  time  of  the  year, 
namely,  at  the  beginning  of  India's  slack  season  when  her 
exports  are  smallest.  The  result  was  that  India's  visible 
trade  balance,  which  is  usually  " favorable"  because  of  her 
heavy  home  charges  and  her  heavy  dividend  and  interest 
payments  on  investments  of  foreign  capital,  actually  be- 
came ''unfavorable"  for  a  time.1 

(2)  Heavy  Importation  of  Silver.  India's  home  charges 
are  in  the  nature  of  the  price  she  pays  for  the  "imports  of 
services"  which  she  purchases  from  the  British  Government ; 
the  council  bills  are  bills  of  exchange  which  the  British 
Government,  the  exporter  of  these  services,  in  order  to  se- 
cure its  remuneration,  draws  upon  the  Indian  fisc,  the  im- 
porter. The  Secretary  of  State  sells  these  bills  to  persons 
in  England  who  are  purchasing  Indian  products  or  Indian 
securities.  The  council  bills  therefore  represent  India's 
imports  of  services  which  she  pays  for  by  her  exports  of 
products  and  of  equities  in  her  properties.  Inasmuch  as 
the  Secretary's  excessive  price  for  council  bills  made  the 
use  of  these  exports  of  British  Government  services  to 
India  impracticable  on  any  considerable  scale  as  remittance 
to  India  in  payment  for  her  exports,  it  became  profitable 
to  find  some  other  kind  of  British  export  as  a  means  of  re- 
mittance. Moreover,  the  higher  the  exchange  rate,  and 
the  longer  the  high  rates  prevailed,  the  more  profitable 

1  East  India  Fin.  Stat.,  1894-95,  p.  12. 


44  MODERN  CURRENCY  REFORMS 

the  exportation  of  other  goods  to  India  became,  since,  as 
the  demand  for  means  of  remittance  to  India  increased 
the  amount  in  English  pence  which  the  British  exporter 
could  secure  for  a  given  bill  drawn  against  shipments  to 
India  also  increased.  A  common  resort  in  such  a  situation 
is  to  export  securities  and  to  draw  bills  against  them.  But 
obviously  India  was  not  buying  British  securities  at  this 
time  nor  was  she  buying  back  her  own  securities.  Strong 
economic  forces  had  caused  the  flow  of  securities  from 
the  country  that  was  economically  new  to  the  one  that 
was  economically  old.  Since  British  securities  were 
unavailable  as  exports  to  India  with  which  to  break  down 
this  attempt  of  the  Secretary  of  State  to  establish  a  quasi- 
monopoly  price  on  remittances  to  India,  this  function  was 
performed  by  the  exportation  of  that  commodity  which  in 
India  had  been  so  highly  marketable  in  the  past,  viz.  silver. 
This  was  an  occurrence  which  greatly  surprised  many,  both 
in  India  and  England,  who  had  expected  that  with  the 
closing  of  the  mints  the  Secretary  of  State  in  his  sale  of 
council  bills  would  be  relieved  from  the  competition  of 
silver  exports  as  a  means  of  remittance  to  the  East.1  India, 
for  generations  the  land  of  treasure  hoards,  of  ornaments, 
and  of  the  free  coinage  of  silver,  also  a  land  whose  great 
population  was  in  the  main  ignorant,  and  dominated  by 
custom,  such  an  India  could  hardly  be  expected  to  dis- 
continue the  buying  of  silver  when  it  became  cheap,  just 
because  the  mints  had  been  closed  to  free  coinage.  What 
did  the  mass  of  India's  three  hundred  millions  of  people 
know  of  the  closing  of  the  mints  ?  In  the  past  a  tola  of  silver 
had  always  been  saleable  at  the  mints  and  at  the  bazaars 
for  approximately  one  rupee,  and  the  rupee  had  been  con- 
vertible, by  melting,  into  a  tola.  The  majority  of  the 
natives  saw  no  reason  why  such  would  not  be  the  case 
in  the  future.  But  the  advance  in  the  value  of  the  rupee 

1Cf.  The  [London]  Economist,  Dec.  16,  1893,  p.  1488;    and  Herschell 
Com.  Rep.,  sec.  123;   also  cf.  infra,  pp.  114-115. 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE    45 

after  the  closing  of  the  mints  was  making  the  rupee  price 
of  a  tola  in  the  market  lower  than  ever  before,  at  just  the 
time  when  the  practical  suspension  of  the  sale  of  council 
bills  was  putting  a  premium  on  bills  of  exchange  drawn 
against  the  exportation  of  silver  to  India.  Said  the  Indian 
Financial  Statement  for  1894-95  : 

"The  divorce  between  the  value  of  coined  and  of  uncoined 
silver  brought  about  a  state  of  things  utterly  unknown  in 
Indian  history  —  in  the  experience  at  least  of  any  of  the 
present  generation  —  viz.,  that  uncoined  silver  could  be  sold 
at  a  profit  for  considerably  less  than  its  weight  in  coined 
silver.  Silver  dealers  rushed  in  to  make  a  profit  out  of  the 
inability  of  the  ordinary  Indian  to  understand  that  it  was 
not  necessarily  a  profitable  transaction  to  buy  a  tola  of 
rupee  silver  for  15  annas.  The  question  was  violently 
agitated  of  imposing  a  silver  import  duty,  so  as  to  prevent 
a  demand  for  silver  that  threatened  to  annihilate,  by  its 
own  force,  that  balance  of  trade  which  had  hitherto  required 
settlement  by  council  bills."  l 

For  the  eight  months  July  1893  to  February  1894  inclu- 
sive, India's  silver  imports  amounted  to  approximately  31 
million  fine  ounces.2 

Such  heavy  importations  of  silver  at  this  time  were 
unfortunate.  One  of  the  strongest  objections  urged  against 
the  Government's  plan  of  closing  the  mints  and  raising 
the  gold  value  of  the  rupee  by  relative  contraction  of 
the  currency  had  been  that  it  would  at  one  and  the  same 
time  depress  the  gold  price  of  silver  and  raise  the  value  of 
the  rupee,  with  the  result  that  India's  great  hoards  of  un- 
coined silver  —  hoards  which  under  the  silver  standard 
could  readily  be  turned  into  coin  with  little  loss  in  times  of 

1  Ind.  Fin.  Stat.  for  1894-95,  p.  n. 

2  These  heavy  silver  imports  taking  the  place  of  council  bills  as  a  means  of 
remittance  to  India  were  obviously  a  surprise  to  the  Secretary  of  State,  for 
he  had  said  in  a  telegram  to  the  Viceroy  as  late  as  July  4, 1893 :  "Though 
silver  will  no  longer  compete  with  bills  on  India,  gold  may  compete."    Cd. 
7253  of  1893,  p.  3. 


46  MODERN  CURRENCY  REFORMS 

famine  or  other  great  emergency  —  would  be  greatly  de- 
pressed in  price.  But  here  was  a  situation  in  which  the 
Government's  very  mechanism  for  raising  the  value  of  the 
rupee  was  aggravating  the  evil  by  artificially  stimulating 
the  importation  of  silver  bullion.  In  ignorance  of  the 
changed  situation,  and  stimulated  by  the  Secretary  of 
State's  action,  the  Indian  people  therefore  were  buying 
silver  heavily  upon  what  was  practically  certain  to  be  a 
falling  market. 

The  large  supply  of  uncoined  silver  in  India  had  been 
believed  by  many  to  offer  a  serious  obstacle  to  that  rarifica- 
tion  of  the  currency  which  the  reform  plan  contemplated. 
There  was  the  constant  menace  of  counterfeiting  with  full 
weight  silver,  a  menace  which  would  increase  as  the 
money  value  of  the  rupee  rose  above  the  bullion  value; 
there  was  the  possibility  of  the  use  of  silver  bullion  as  a 
medium  of  exchange :  and,  most  important,  there  was  the 
stimulus  to  native  discontent  and  possibly  revolution  that 
this  large  supply  of  depreciating  silver  would  continually 
offer  to  the  natives.1  All  these  dangers  were  aggravated 

1  "The  change  in  the  value  of  the  rupee  inflicts  a  cruel  injury  on  an 
enormous  class  in  India,  namely,  on  those  who  have  hoarded  silver  orna- 
ments (a  practice  almost  universal).  Hitherto  the  mints  have  always  af- 
forded a  fixed  market  in  which  nearly  the  full  value  of  these  ornaments  could 
be  at  once  realized  without  any  shadow  of  doubt ;  and  in  times  of  scarcity  or 
depression,  enormous  quantities  of  silver  ornaments  have  been  brought  to 
the  mints  or  deposited  with  the  buniahs  by  those  who  had  to  pay  their  taxes, 
or  satisfy  other  obligations  in  rupees ;  but  now  this  market  for  such  hoards  no 
longer  exists ;  the  owners  of  such  ornaments  will  not  only  find  that  the  value 
of  their  hoards  when  measured  in  rupees  is  already  about  twelve  per  cent 
less  than  before,  but  that  there  is  now  no  certainty  about  their  value,  which 
is  fluctuating  and  likely  to  fall  still  lower,  thus  giving  rise  to  an  element  of 
uncertainty,  of  which  the  buniahs  will  naturally  take  advantage,  to  the 
prejudice  of  the  unfortunate  holders  of  the  hoards."  Guilford  L.  Moles- 
worth,  British  delegate  from  India  to  the  Brussels  International  Monetary 
Conference  of  1892,  in  Ann.  Amer.  Acad.  Pol.  and  Soc.  Sci.,  IV  (1893-94), 

p.  524- 

The  Herschell  Committee,  although  disposed  to  minimize  the  importance 
of  these  ornament  hoards  for  later  years,  said  that  no  less  than  45  million 
rupees  were  coined  at  the  Indian  mints  from  the  melting  down  of  such 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE  47 

by  the  large  importation  of  silver  after  the  closing  of  the 
mints. 

The  situation  became  so  serious  that  after  considerable 
discussion  the  Indian  Government  imposed  an  import  duty 
on  silver  coin  and  bullion.1 

(3)  Fiscal  Results.  A  third  result  of  the  Secretary  of 
State's  attempt  arbitrarily  to  maintain  a  high  price  for 
council  bills  was  the  imposition  of  a  heavy  financial  burden 
on  the  Indian  Government.  The  Secretary  of  State  had 
estimated  that  he  would  raise  £18.7  millions  by  council  bills 
during  the  fiscal  year  ending  March  31,  1894.  During 
April,  May,  and  June  of  1893  he  issued  an  unusually  large 
amount  of  council  bills  aggregating  over  £5.7  millions, 
and  leaving,  according  to  his  estimate,  £13  millions  to  be 
sold  during  the  balance  of  the  fiscal  year.  When  in  the  first 
week  of  July  the  Viceroy  sought  to  have  him  stop  the  extra 
allotments  of  council  bills  and  to  hold  the  price  of  bills 
up  to  i6d.j  he  replied  that,  considering  the  requirements  of 
the  home  treasury  which  would  average  about  £347,000  a 
week,  he  could  not  run  the  risk  of  holding  to  that  rate.2 
None  the  less,  as  we  have  seen,  he  yielded  to  the  extent  of 
undertaking  to  maintain  a  rate  of  i$%d.  and  later  -of 
i$?d.  The  result  was  that  for  the  seven  months, 
July  1893  to  January  1894,  during  which  he  was  trying  to 
maintain  his  high  rates,  he  sold  council  bills  only  to  the 
amount  of  £862,602,  whereas  according  to  his  estimate,  he 
should  have  sold  £10.1  millions.  To  meet  the  emergency 
certain  payments  were  delayed,  others  reduced,  the  Secre- 
tary's cash  balance  was  permitted  to  decline  over  a  million 
pounds,  and  £7,386,000  were  borrowed.  Meanwhile,  at 
the  very  time  these  inconveniences  were  being  experienced 


ornaments  during  the  great  famine  of  1877  and  the  years  immediately  follow- 
ing.   Report,  sec.  106. 

1  Cf.  East  India  Fin.  Stat.  for  1895-96,  pp.  6, 10,  and  n ;  also  Fowler  Com. 
Rep.,  App.  II,  Table  5. 

2  Cf.  telegrams  Nos.  4,  6,  and  7.     Cd.  7253  of  1893,  pp.  3  and  4. 


48  MODERN  CURRENCY  REFORMS 

and  the  interest-bearing  debt  incurred,  there  was  "an  enor- 
mous accumulation  of  silver"  in  the  Indian  Treasury,  and 
the  Secretary's  idle  cash  balance  in  India  at  the  end  of  Feb- 
ruary had  grown  to  the  unprecedented  figure  of  R.  250  mil- 
lions.1 

"Starving  the  Circulation"  1893-1898 

We  are  now  prepared  to  consider  the  more  general 
aspects  of  India's  five-years  experience  in  raising  the  gold 
value  of  the  rupee.  The  essence  of  the  reform  plan  as 
formulated  by  the  Indian  Government  and  the  Herschell 
Committee  was,  by  closing  the  Indian  mints  and  limiting 
the  supply  of  money  while  the  demand  for  money  was  in- 
creasing through  the  growth  of  population  and  trade,  to 
divorce  the  value  of  the  rupee  from  that  of  its  silver  content, 
and  to  prevent  its  further  depreciation.  Some  absolute 
reduction  in  the  rupee  circulation  was  also  contemplated.2 
In  the  minds  of  those  responsible  for  the  plan  the  object,  as 
we  have  seen,3  was  not  so  much  to  raise  the  value  of  the 
rupee  as  to  stabilize  it  and  prevent  its  further  depreciation. 

The  i6J.  par  was  selected  largely  because  it  represented 
a  close  approximation  to  the  average  value  of  the  rupee 
during  the  years  immediately  preceding,  and  at  the  same 
time  left  a  sufficient  margin  of  safety  above  the  bullion 
value  at  the  time  to  protect  it  from  the  melting  pot.  This 
i6d.  rate,  moreover,  was  looked  upon  as  a  purely  tentative 
one  that  might  be  raised  if  the  situation  should  so  demand. 
The  plan  adopted  therefore  was  not  so  much  to  raise  the 
value  of  the  rupee  as  it  was  to  maintain  it,  although  a  cer- 
tain amount  of  "raising"  was  obviously  necessary.4  In  a 
telegram  to  the  Viceroy  dated  August  23,  1893,  the  Secre- 
tary of  State,  protesting  the  advisability  of  meeting  the 

1  East  India  Fin.  Stat.  for  1894-95,  pp.  12-13. 

3  Herschell  Com.  Rep.,  sec.  50;  and  David  Barbour,  The  Standard  of 
Value,  p.  186. 

3  Supra,  pp.  35-36. 

4  Cf.  Herschell  Com.  Rep.,  sees.  135  and  150. 


RAISING  THE  RUPEE  TO  A  GOLD   VALUE  OF  16  PENCE    49 

Government   of   India's   suggestion   that   he   announce  a 
minimum  rate  of  i6d.  for  council  bills  said : 

"The  object  of  the  recent  currency  legislation  was  to 
arrest  the  further  fall  in  exchange  which  appeared  to  be 
imminent  at  the  time.'* 

Sir  David  B arbour,  twenty  years  later,  in  explaining 
the  theory  of  the  reform  said : 

"  The  proposals  recommended  by  the  Government  of  India 
had  been  drawn  up  by  me  and  were  to  the  effect  that  the 
Indian  mints  should  be  closed  to  the  unlimited  coinage  of 
silver  and  no  further  steps  taken  until  the  effect  of  closing 
the  mints  had  been  ascertained."  And  again :  "I  was 
firmly  convinced  of  the  soundness  of  the  quantity  theory 
of  money  and  knew  that  if  the  unlimited  coinage  of  silver 
was  stopped,  it  was  quite  possible  to  reduce  the  amount  of 
the  rupee  circulation  to  such  extent  as  to  bring  the  Indian 
exchange  to  a  par  with  gold  at  a  rate  of  exchange  which  could 
be  permanently  maintained.  How  great  the  necessary 
amount  of  reduction  might  be  I  could  not  tell." * 

In  1898,  W.  H.  Cheetham  of  Calcutta  stated  the  theory 
of  the  reform  well  when  he  said : 

11  The  closing  of  the  mints  has  reduced  the  volume  of  the 
currency  in  relation  to  trade.  Population  is  always  increas- 
ing, and  trade  is  expanding ;  if  you  do  not  continually  add 
to  the  currency,  you  actually  in  fact  reduce  it ;  that  is  to 
say,  it  is  reduced  in  relation  to  requirements."  The  plan 
was  variously  called  "starving  the  currency,"  " rarification 
of  the  currency,"  "  creation  of  scarcity  value,"  and  "  relative 
contraction  of  the  currency." 

Effect  of  Closing  Mints  on  Relation  between  Bullion  Value 
and  Exchange  Value  of  Rupee.  How  did  this  scheme  of 
relative  contraction  work  ?  The  story  of  the  next  six  years 

1  David  Barbour,  The  Standard  of  Value,  pp.  202  and  186. 

2  Fowler  Com.  Rep.,  Q.  8713. 


50  MODERN  CURRENCY  REFORMS 

of  Indian  exchange  is  told  graphically  on  the  following 
chart.  One  of  the  first  facts  that  strike  a  person,  on 
examining  the  chart,  is  that  down  to  June  1893  — tne 
month  in  which  the  mints  were  closed  —  the  bullion  value 


PEKCE 


PENCE 


INDIAN  CURRENCY  REFORM 
MONTHLY  VARIATIONS  IN  EXCHANGE 
BULLION  VALUES  OF  RUPEE 


of  the  rupee  and  the  exchange  value  moved  continually 
together,  but  that  from  that  date  forward  the  close  par- 
allelism in  the  movements  of  the  two  values  ceased.  It 
was  no  longer  possible  to  have  bullion  transformed  into 
rupees  by  the  payment  of  a  small  brassage  charge  whenever 
the  gold  value  of  the  rupee  rose  above  the  gold  value  of 
1 80  grains  of  silver,  11/12  fine.  The  closing  of  the  mints 
had  divorced  the  two  values  and  the  divorce  decree  became 
effective  at  once. 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE     51 

A  second  fact  that  strikes  the  attention  is,  that,  ignoring 
the  brief  and  sharp  rise  in  exchange  immediately  following 
the  closing  of  the  mints  which  was  due  to  the  Secretary  of 
State's  ill-fated  attempt  to  hold  up  exchange  by  maintain- 
ing excessively  high  rates  for  council  bills,  exchange  moved 
downward  until  January  1895 ;  and  that,  although  during 
this  period  the  exchange  value  of  the  rupee  was  always  far 
above  the  bullion  value,  and  the  difference  tended  to  be  a 
widening  one,  there  was  still  a  remarkable  parallelism  in 
the  movements  of  the  two  curves.  Clearly  the  closing  of 
the  mints  had  failed  to  maintain  exchange  at  the  old  level, 
and,  although  the  bullion  value  of  the  rupee  and  the  ex- 
change value  may  have  been  divorced,  they  still  showed  a 
considerable  " hankering  after  each  other."  From  Febru- 
ary *  1894  to  January  1895,  the  correlation  between  the 
mean  monthly  exchange  value  of  the  rupee  and  the  average 
monthly  bullion  value  gives  a  coefficient  (according  to  Karl 
Pearson's  method)  of  -f  .58  ±  a  probable  error  of  .128. 
This  is  a  small  correlation  but  a  real  one. 

What  is  the  explanation  of  this  decline  in  the  exchange 
value  of  the  rupee  at  a  time  when  the  mints  were  closed, 
and  of  this  correlation  between  the  exchange  value  and  the 
bullion  value  of  the  rupee  at  a  time  when  bullion  could  not 
be  transformed  into  rupees  on  private  account  at  the 
mints  ? 

The  first  point  to  be  noted  is  that  the  decline  in  the 
sterling  exchange  value  of  the  rupee  was  not  so  great  as  is 
commonly  supposed.  The  "sag"  in  exchange  during  the 
greater  part  of  the  year  1894  has  usually  been  contrasted 
with  the  "peak"  of  June  1893,  which  was  largely  nominal 
and  due  to  the  Secretary  of  State's  council  bill  fiasco.  If 
one  compares  1894  rates  with  the  rates  prevailing  im- 
mediately before  the  closing  of  the  mints,  he  will  find  that 

1  February  is  taken  as  the  first  month  of  comparison  because  it  was  not 
until  January  20  that  the  Secretary  of  State  discontinued  his  effort  to  hold 
up  the  price  of  council  bills.  Supra,  pp.  41-42. 


52  MODERN  CURRENCY  REFORMS 

the  average  telegraphic  transfer  rate  in  Calcutta  for  the 
period  April  5  to  June  2,  1893,  was  i^d,  and  for  the 
period  February  1894  to  January  1895  (monthly  averages, 
inclusive)  was  i^d.  —  a  decline  of  9.8  per  cent.  The 
decline  from  the  average  of  the  first  period  to  the  minimum 
rate  of  1895  (viz.,  i2|J.  in  January)  was  14  per  cent. 
These  were  not  heavy  declines  for  a  country  like  India,  as  a 
glance  at  the  exchange  curve  of  the  chart  for  the  period 
prior  to  the  closing  of  the  mints  will  show. 

The  second  point  to  note  is  that  the  supply  of  currency 
was  not  absolutely  limited  to  the  amount  in  circulation  at 
the  time  the  mints  were  closed.  "  Immediately  after  the 
closing  of  the  mints,  the  Government  accepted  from 
banks  and  others  silver  to  the  amount  of  Rx.  2,000,000  [i.e. 
20,000,000  rupees],  which  had  been  shipped  to  India  before 
the  closing  of  the  mints,  and  coined  it.  .  .  ." 1  There 
was  an  expansion  in  the  average  circulation  of  notes  un- 
covered by  silver  during  the  fiscal  year  ending  March  31, 
1895,  of  25.3  millions,  whereas  during  the  preceding  fiscal 
year  there  was  a  contraction  of  28.2  millions.2  Further,  the 
resumption  of  the  sale  of  council  bills  in  considerable  quanti- 
ties after  January  1894  released  from  government  treasuries 
many  millions  of  rupees  that  had  been  physically  tied  up 
in  vaults  during  the  period  of  the  practical  suspension  of 
council  bill  sales.  For  the  fiscal  years  1892-93,  1893-94, 
and  1894-95,  respectively,  the  amounts  of  council  bills 
drawn  were  (in  round  numbers)  R.  265  millions,  R.  157 
millions,  and  R.  310  millions,  showing  that  the  sales  of 
1894-95  were  practically  double  those  of  the  preceding 
year.3  The  cash  balances  in  government  treasuries  (exclu- 
sive of  those  on  deposit  in  banks)  for  the  close  of  the  same 
three  years  respectively  were,  R.  110.7  millions,  R.  222.omil- 

1 J.  Barr  Robertson,  The  Currency  Policy  of  India,  in  Jour.  Soc.  of  Arts, 
March  27,  1903,  p.  427. 

8  Statistical  Abstract  relating  to  British  India,  33d  number  (1899),  p.  140. 
3  Ibid.,  p.  137. 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE     53 

lions,  and  R.  181.0  millions.1  There  were,  moreover,  many 
millions  of  rupees  in  circulation  in  the  native  states  of 
India,  and  in  the  other  countries  in  the  neighborhood, 
and  many  of  these  rupees  returned  to  British  India  when 
the  silver  exchanges  and  the  falling  rupee  price  of  silver 
showed  that  the  rupee  possessed  a  substantially  higher 
value  as  money  than  as  bullion.  Probably  the  largest 
source  of  the  increase  in  the  rupee  circulation,  however, 
was  the  rupee  hoards.  The  efficiency  of  money  is  measured 
in  terms  of  the  rate  of  turnover.  Money  in  hoards  has  a 
turnover  rate  of  zero.  What  proportion  of  India's  enor- 
mous hoards  of  silver  was  in  the  form  of  rupees,  and  what 
proportion  in  the  forms  of  bullion  and  ornaments,  no  one 
knew.  Sir  A.  P.  MacDonell,  who  had  held  high  official 
positions  in  India  for  many  years,  and  who  was  a  member 
of  the  Viceroy's  Council  from  the  end  of  1893  unt^  April 
1895,  testified  before  the  Fowler  Committee  that  in  his 
opinion  an  Indian  cultivator,  out  of  each  100  rupees  saved, 
would  normally  store  away  75  in  rupees  and  melt  down  the 
other  25  for  ornaments.2  Mr.  W.  H.  Cheetham,  a  mer- 
chant of  Calcutta,  testified  before  the  same  Committee 
that  the  above  testimony  of  MacDonell's  coincided  with 
independent  evidence  that  he  had.3  After  the  closing  of 
the  mints  the  prices  of  silver  bullion  and  ornaments  in  India 
declined,  i.e.  from  the  point  of  view  of  the  natives  they 
became  cheaper.  The  price  of  a  tola  of  silver  fell  and  silver 
could  no  longer  be  turned  into  rupees  at  the  mints.4  From 
this  situation  there  naturally  followed  a  reduction  in  the 

1  Computed  from  figures  given  for  the  different  treasuries,  etc.  Ibid.,  p.  136. 

Were  the  figures  for  1893-94  and  1894-95  for  the  end  of  January  instead  of 
the  end  of  March,  the  increase  in  circulation  from  this  source  would  probably 
have  appeared  much  greater  since  the  sale  of  council  bills  on  a  substantial 
scale  was  resumed  after  January  20,  1894. 

a  Fowler  Com.  Rep.,  Evidence,  Q.  5769. 

» Ibid.,  Q.  8809. 

4  Preceding  the  closing  of  the  mints  the  average  annual  coining  of  rupees 
had  been  about  70  millions.  Correspondence  Respecting  the  Proposals  on 
Currency  Made  by  the  Government  of  India,  Cd.  8840  of  1898,  p.  3. 


54  MODERN  CURRENCY  REFORMS 

number  of  rupees  being  melted  down  l  and  an  increased 
accumulation  of  ornaments  which  were  becoming  cheaper. 
The  average  native  could  hardly  be  expected  to  believe 
that  the  rupee  was  appreciating.  To  this  day  the  average 
American  business  man  believes  that  "a  dollar  is  a  dollar," 
which  is  his  way  of  saying  that  the  dollar  is  stable  in  value 
and  all  other  goods  vary.  The  result  of  this  situation  in 
India  was  the  continuance  in  circulation  as  money  of  many 
rupees  that  under  the  silver  standard  would  have  been  melted 
down  and  hoarded  or  exported;  and  the  calling  out  of 
hoards  and  into  active  circulation  of  millions  of  rupees 
whose  monetary  efficiency  had  previously  been  zero. 

Any  attempt  at  a  complete  explanation  of  the  decline  in 
exchange  during  the  calendar  year  1894  would  require  the 
consideration  of  numerous  other  factors,  the  chief  of  which 
would  be  the  relative  monetary  demand  as  exemplified  in 
the  amount  of  business  done  in  1894  in  comparison  with 
1893.  On  this  subject  there  is  little  useful  information 
available,  and  such  consideration  as  we  can  give  it  will  be 
found  later  when  the  period  of  "rupee  appreciation"  as  a 
whole  is  discussed.2  Here  it  is  merely  intended  to  show 
that  there  were  important  forces 3  at  work  during  the  early 
stages  of  the  period  which  prevented  that  rigid  limitation 
of  the  currency  supply  that  was  desirable  in  the  interest  of 
a  prompt  "rarefication  of  the  currency." 

Having  reached  its  low  point  in  January  1895,  the  ex- 
change value  of  the  rupee  began  an  upward  move  inde- 
pendent of  the  bullion  value,  which  continued  at  the  lowest 


1  Mr.  Frederick  Harrison  estimated  that  at  the  time  of  the  closing  of  the 
mints  the  normal  annual  "wastage"  of  rupees  was  60  million,  but  that  of  this 
sum,  the  wastage  of  27^  millions  was  due  to  melting  for  industrial  usage  —  a 
form  of  wastage  which  the  closing  of  the  mints  had  practically  stopped. 
Econ.  Journ.,  IV  (1894)  p.  264. 

8  Cf.  infra,  pp.  70-71. 

*  One  of  these  forces  was  the  depressing  effect  on  business  which  the  Secre- 
tary of  State's  unfortunate  council  bill  policy  exerted  through  causing  the 
public  to  lose  confidence  in  the  success  of  the  new  currency  plan. 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE     55 

level  in  history ;  and  by  the  latter  part  of  1897  the  exchange 
value  nearly  reached  the  i6d.  par.  At  that  point,  however, 
the  rupee  showed  great  instability,  and  seemed  unable  to 
attain  and  clinch  the  i6d.  rate.1  This  was  the  situation 
when  on  March  3,  1898  the  Government  of  India  sent  a 
communication  to  the  Secretary  of  State  for  India  calling 
attention  to  "the  pressing  necessity  of  taking  active 
measures  to  secure  the  stability  of  exchange  which  was  the 
main  object  of  the  policy  adopted  in  June  1893"  —  a 
communication  which  led  to  the  appointment  of  the  Indian 
Currency  Committee  of  1898  commonly  known  as  the 
Fowler  Committee  from  the  name  of  its  chairman,  Henry 
N.  Fowler.  Before  taking  up  the  work  and  recommenda- 
tions of  that  Committee,  it  will  be  well  to  consider  the  ex- 
tent to  which  the  rupee  appreciated  and  some  of  the  forces 
at  work  during  the  period  of  appreciation. 

1  In  a  memorandum  on  Discount  Rates  in  India  submitted  to  the  Fowler 
Committee  (App.  I,  p.  67),  Messrs.  J.  M.  Anderson  and  H.  M.  Ross  said: 
"...  The  fixing  of  15.  4d.  as  the  convertible  rate  of  the  rupee  in  India,  and 
of  is.  4$zd.  as  the  convertible  rate  against  deposits  of  gold  in  England, 
amounts  to  a  firm  offer  of  rupees  to  all  comers  for  all  time  at  these  rates  [?]. 
It  is  therefore  clear  that  every  banker  or  merchant,  having  such  firm  offer 
to  fall  back  on,  will  exercise  all  his  ingenuity  to  obtain  his  rupee  requirements 
on  better  terms,  and  will  only  close  with  the  Government's  offer  when  all 
the  other  means  have  failed  him.  This  is  the  secret  of  the  failure  of  the 
repeated  attempts  of  the  Secretary  of  State  to  fix  a  minimum  for  his  council 
bills,  for  it  is  to  be  understood  that  the  minimum  of  the  Secretary  of  State  is 
the  maximum  of  the  banker  or  merchant,  and,  as  such,  is  evaded  as  long  as 
possible.  Each  time  that  exchange  approaches  this  maximum,  the  export 
merchant  ceases  to  sell  bills,  since  he  cannot  sell  them  on  worse  terms,  and 
may,  by  waiting,  sell  them  on  better,  while  the  importer  hastens  to  buy 
sterling  in  excess  of  his  requirements,  because  he  cannot  lose,  and  may  gain, 
by  so  doing.  During  the  last  two  years  exchange  has  again  and  again 
approached  this  maximum,  only  to  recede  almost  immediately,  from  the 
effect  of  mercantile  and  banking  operations  such  as  are  here  described." 

Another  reason  for  this  inability  to  clinch  the  i6d.  rate  appears  to  have 
been  the  tendency  of  Europeans  who  lacked  confidence  in  the  system  to  take 
advantage  of  this  rate,  when  it  was  reached,  to  send  capital  back  home.  Cf . 
Memorandum  of  Chairman  of  Madras  Chamber  of  Commerce,  in  Correspond- 
ence Respecting  the  Proposal  on  Currency  Made  by  the  Government  of 
India,  Cd.  8840  of  1898,  p.  12.  Cf.  also  Fowler  Com.  Rep.,  Evidence,  Qs. 
287  and  288. 


MODERN  CURRENCY  REFORMS 


To  What  Extent  Did  the  Rupee  Appreciate  between  1893 
and  1898? 

The  chart  shows  that  the  sterling  exchange  value  of  the 
rupee,  after  declining  to  about  i2^d.  in  January  1895,  rose 
to  approximately  i6d.  in  January  1898.  But  this  tells  us 
merely  the  value  of  the  rupee  in  terms  of  one  other  com- 
modity —  gold,  a  commodity  which  itself  was  very  unstable, 
during  this  period. 

The  value  of  gold  is  best  expressed  in  its  purchasing  power 
over  a  large  number  of  commodities.  For  England  the 
variations  in  the  purchasing  power  of  gold  over  an  average 
of  45  commodities  are  expressed  in  the  reciprocals  of  the 
Sauerbeck  index  numbers  of  wholesale  prices.  Let  us  com- 
pare the  annual  movement  of  the  value  of  gold  so  expressed 
with  the  annual  movement  in  the  gold  value  of  the  rupee 
for  this  period. 

APPRECIATION  or  RUPEE  IN  TERMS  OF  BRITISH  COMMODITIES,  1893-1898 
(A  minus  sign  shows  decrease) 


CALENDAR 
YEAR 

RECIPROCAL 
OF  SAUERBECK 
INDEX 
NUMBERS 
Av.  1867-77 

=  IOO 

PERCENTAGE 
INCREASE 
EACH  YEAR 

OVER 

PRECEDING 
YEAR. 

AVERAGE 
EXCHANGE 
VALUE  OF 
RUPEE 
(TELEGRAPHIC 
TRANSFER) 
PENCE 

PERCENTAGE 
INCREASE 
EACH  YEAR 

OVER 

PRECEDING 
YEAR 

ANNUAL 
APPRECIATION 
OF  RUPEE  IN 
TERMS  OF 
ENGLISH 
COMMODITIES 
PERCENTAGE 

1893 

147.1 

0.0 

14.97 

1894 

I58-7 

7-9 

I3-4I 

—  10.4 

-  2.5 

1895 

161.3 

1.6 

13.28 

—  i.o 

0.6 

1896 

164.0 

i-7 

14.38 

8-3 

10.0 

1897 

161.3 

-1.6 

14-73 

2.4 

0.8 

1898 

156.2 

-3.2 

15-93 

8.2 

5-0 

Briefly  summarized  the  table  shows :  (i)  that  in  terms  of 
purchasing  power  over  commodities  in  the  United  Kingdom 
the  rupee  declined  2.5  per  cent  in  1894,  and  that  each  suc- 
ceeding year  to  1898  it  rose,  the  rises  in  1896  and  1898 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE    57 

however,  being  the  only  important  ones;  (2)  that  in  1896 
the  gold  value  of  the  rupee  rose  8.3  per  cent,  but  that,  inas- 
much as  the  value  of  gold  itself  rose  1.7  per  cent,  the  actual 
appreciation  of  the  rupee  (in  terms  of  purchasing  power 
over  British  commodities)  was  10  per  cent;  (3)  that  in 
1897  and  1898,  while  the  value  of  the  rupee  moved  toward 
i6d.  gold,  the  value  of  i6d.  gold  moved  to  meet  the  rupee, 
thereby  hastening  the  time  of  the  attainment  of  the  i6d. 
gold  par;  (4)  that  from  1894  to  1898  gold  depreciated 
1.6  per  cent  in  terms  of  purchasing  power  over  English 
commodities,  and  the  rupee  appreciated  17.2  per  cent. 

But  how  about  the  value  of  the  rupee  in  India  as  measured 
by  its  purchasing  power  over  Indian  commodities?  On 
this  subject  the  data  are  less  satisfactory,  for  India  is  a 
large  country  in  which  very  different  prices  often  prevail 
for  the  same  commodity  in  different  sections.  The  best 
criterion  of  the  variations  in  the  purchasing  power  of  the 
rupee  in  India  is  found  by  taking  the  reciprocals  of  the 
Atkinson  index  numbers  of  the  prices  of  one  hundred  com- 
modities in  India.1  Below  is  given  a  table  showing,  for 
the  years  1893-99,  the  Atkinson  index  numbers  for  each 
of  three  groups  of  commodities.  Index  numbers  are  also 
given  showing  the  annual  fluctuations  in  the  value  of 
the  rupee  as  expressed  in  its  purchasing  power  over  each 
of  these  groups  of  commodities,  and  over  all  the  groups 
combined. 

1  These  index  numbers  were  prepared  by  Mr.  Fred  J.  Atkinson,  Ac- 
countant General  of  the  United  Provinces  of  India.  They  were  first  pub- 
lished in  the  Journal  of  the  Royal  Statistical  Society  of  March  1897,  and 
were  brought  down  to  1908  in  the  isssue  of  September  1909  (pp.  500-502). 
The  loo  commodities  consist  of  60  articles  of  food,  29  of  raw  produce,  and 
ii  of  manufactures.  The  average  for  the  years  1868-76  is  taken  as  100. 
The  weighting  was  accomplished  "by  giving  to  each  commodity  included 
as  many  quotations  as  corresponded  to  its  importance  in  the  whole  pro- 
duction value  of  India  in  1893."  Cf.  Bulletin  No.  73,  U.  S.  Bureau  of 
Labor  Statistics,  pp.  276-282. 


58 


MODERN  CURRENCY  REFORMS 


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RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE      59 

For  the  five  years  prior  to  the  closing  of  the  mints  the 
rupee  had  been  depreciating  in  its  purchasing  power  over 
commodities  in  India ;  that  is,  prices  had  been  rising.1  Im- 
mediately after  the  closing  of  the  mints  the  value  of  the 
rupee  as  measured  by  its  purchasing  power  over  Indian 
commodities  began  to  increase.  In  1894  it  rose  5  per  cent 
over  1893  and  in  1895  it  rose  2-6  per  cent  over  1894.  This 
increase  in  purchasing  power  in  both  of  these  years  was 
limited  to  the  "food  group"  of  60  articles,  the  purchasing 
power  of  the  rupee  over  the  "manufactures  group"  of  n 
articles  having  declined  slightly  in  each  of  the  two  years, 
and  that  over  the  "raw  produce  group"  of  29  articles  having 
declined  slightly  in  1894,  and  substantially  in  1895.  The 
years  1896  and  1897  went  contrary  to  expectations  and 
each  year  witnessed  a  large  depreciation  in  the  purchasing 
power  of  the  rupee,  the  decline  being  8.7  per  cent  in  1896 
and  14.7  per  cent  in  1897.  A  glance  at  the  table,  however, 
will  show  that  this  decline  took  place  only  in  the  "food 
group,"  the  purchasing  power  of  the  rupee  over  raw 
produce  having  increased  on  the  average  4.1  per  cent  in 
1896,  and  5.3  per  cent  in  1897;  while  that  over  manu- 
factures increased  6.4  per  cent  in  1896  and  7.8  per  cent 
in  1897.  The  fact  that  prices  in  the  other  groups  fell  in 
these  two  years  while  those  in  the  food  group  rose  is 
explainable  by  the  great  famine  which  India  suffered  at 
that  time. 

In  the  fall  of  1896  the  monsoon  failed,  crops  were  ruined, 
and  India  found  herself  face  to  face  with  one  of  the  worst 
and  most  widespread  famines  in  her  history.  The  famine 
was  accompanied  by  a  visitation  of  the  Plague  in  certain 
parts  of  the  country,  a  devastating  earthquake  along  the 
eastern  side,  and  fanatical  attacks  of  the  tribes  on  the 
northwest  border  necessitating  rather  extensive  military 

1  The  Atkinson  price  index  numbers  for  100  articles  for  these  five  years 
respectively  were  as  follows:  1887  —  101;  1888  —  108;  1889—114; 
1800 — 114;  1891  —  116;  1892  —  128. 


60  MODERN  CURRENCY  REFORMS 

operations.1  The  Government's  expenditures  for  famine 
relief,  which  were  very  large  and  which  caused  heavy 
deficits  in  the  budget,  showed  that  the  effects  of  the 
famine  were  severe  for  about  eighteen  months.2 

During  that  period  the  prices  of  food  (which  constitute 
the  bulk  of  the  items  in  the  Atkinson  index  numbers)  rose  to 
extravagant  heights.  O'Conor's  figures  for  the  retail 
prices  of  India's  seven  chief  food  grains  collected  in  repre- 
sentative places  throughout  the  country  showed  that  the 
prices  of  these  grains  together  moved  as  follows  (taking 
the  average  price  for  1891-95  as  100) : 3 

CALENDAR  YEAR  INDEX  NUMBER 

1893  99-2 

1894  88.7 

1895  93-o 

1896  I2O.O 

1897  160.0 

107.9 


At  the  same  time  the  prices  of  staple  articles  not  belonging 
to  the  group  of  necessary  foods  continued  to  fall,  registering 
the  appreciation  of  the  rupee.  O' Conor  calculated  whole- 
sale price  index  numbers  for  twelve  important  articles  of 
export.4  Omitting  from  his  list  the  two  important  Indian 
food  articles,  rice  and  wheat,  and  combining  the  other  ten 
articles,5  using  Calcutta  prices  where  prices  for  two  or  more 

1  Cf.  Financial  Statement  1897,  pp.  37,  49,  64,  65;  and  Fin.  Stat.  1898, 
pp.  7,  10,  n,  and  15. 

2  For  quarterly  periods  ending  December  1896,  and  March,  June,  Septem- 
ber and  December  1897,  respectively,  the  amount  of  relief  money  spent  by 
the  Government  (in  millions  of  rupees)  was  1.3,  19.0,  24.9,  23.7,  and  6.4. 
The  numbers  of  millions  of  units  relieved  (a  unit  being  one  person  for  one 
day),  respectively,  for  these  five  quarterly  periods  were  32.1,  228.7,  3I2-9> 
222.3,  and  32-8.     East  India  Fin.  Stat.  1898,  pp.  IO-H. 

8  Fowler  Com.  Rep.,  App.  II,  p.  170. 
4  Ibid.,  p.  161. 

6  The  articles  were  cotton,  opium,  linseed,  jute,  jute  gunny  bags,  tea, 
cotton  yarns,  cotton  tea-cloth,  indigo,  and  hides. 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE     6l 

sections  are  given,  we  find  that  the  index  number  of  these 
articles  moved  as  follows : 

1891-95         100.0 

1893  I09-6 

1894  104.0 

1895  105-7 

1896  103.9 

1897  92.6 

1898  87.0 

1899  81.7 

Every  one  of  the  ten  articles  but  jute  was  lower  in  1897 
than  in  1896,  all  but  three  (viz.  cotton,  jute,  and  cotton 
yarn)  were  lower  in  1897  than  in  1895,  and  all  but  three 
(viz.  tea,  indigo,  and  cotton  tea-cloth)  were  lower  in  1898 
than  in  1897,  and  of  those  three  the  two  former  were  un- 
changed and  the  last  rose  but  one  point.  Except  for  foods 
therefore,  which  bore  famine  prices,  the  evidence  points  to  a 
downward  tendency  for  prices  in  India  beginning  with  1895. 
Food  prices  which  had  declined  in  1895  rose  to  great 
heights  during  the  famine  period  of  the  latter  part  of  1896 
and  the  year  1897,  and  then  resumed  their  downward  course. 

John  Stuart  Mill  in  a  well-known  passage  concerning  the 
relation  of  money  to  prices  said:  "At  prices  one  fourth 
higher,  one  fourth  more  money  would  be  required  to  make 
the  accustomed  purchases;  and  if  this  were  not  forth- 
coming, some  of  the  commodities  would  be  without  pur- 
chasers, and  prices  could  not  be  kept  up."  1  In  India  at 
this  time  whence  came  the  money  to  make  possible  the 
marketing  of  these  foods  supplied  at  such  abnormally  high 
prices?  Aside  from  a  small  expansion  of  circulating  bank 
credit,  the  chief  factors  permitting  this  expansion  appear 

1  Political  Economy,  II,  pp.  43-44  (Appleton  Edition,  1899).  Mill 
had  in  mind  a  society  in  which  exchanges  were  all  made  with  money,  and 
apparently  assumed  a  constant  rate  of  monetary  turnover. 


62  MODERN  CURRENCY  REFORMS 

to  have  been  as  follows:  (i)  A  decline  in  the  amount  of 
goods  sold.  Although  food  prices  were  much  higher  than 
normal,  the  quantity  of  food  bought  and  sold  was  much 
smaller.  The  monetary  demand  as  related  to  food  sales 
is  represented  by  the  number  of  units  of  food  sold  multiplied 
by  the  average  price  per  unit.1  Furthermore  the  famine 
interfered  with  business  in  many  other  lines,  lessening  the 
monetary  demand.  (2)  The  monetary  circulation  was 
actually  increased:  (a)  By  an  Act  of  December  17,  1896, 
20  millions  of  rupees  were  authorized  to  be  released  from  the 
government  Paper  Currency  Reserve,  securities  to  be  sub- 
stituted.2 By  the  end  of  March  1897  this  coin  had  all 
been  put  into  circulation,  (b)  The  Government's  cash 
balances  in  treasury  vaults  were  greatly  depleted,  the  funds 
having  been  paid  out  largely  in  relief  work.  Cash  balances 
in  government  treasuries  (exclusive  of  government  balances 
in  banks)  at  the  end  of  the  fiscal  years  1894-95,  1895-96, 
and  1896-97,  respectively,  were :  R.  185.3  millions,  R.  122.0 
millions,  and  R.  99.7  millions.3  (c)  Large  amounts  of  rupees 

—  how  large  no  one  knows  —  were  withdrawn  from  hoards 
and  put  into  active  circulation. 

Relation  between  Exchange  Rates  and  the  Price  Level 

From  what  has  been  said  it  is  evident  that,  while  from 
1895  to  1898  the  general  tendency  of  rupee  prices  was 
downward  (due  allowance  being  made  for  famine  food 
prices),  and  the  tendency  of  exchange  rates  was  upward  — 
both  movements  registering  the  appreciation  of  the  rupee 

—  there  was  apparently  no  appreciable  correlation  between 
the  two  movements.4 

1  The  unit  taken  for  each  article  would  be  the  amount  that  could  be  bought 
for  R.  100  in  the  base  year. 

2  East  India  Fin.  Stat.  1897,  pp.  62-63. 

3  Computed  from  Statistical  Abstract  relating  to  British  India,  33d  No. 
(1899),  p.  136. 

4  The  figures  for  price  movement,  covering  as  they  do  units  of  years, 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE     63 

The  idea  is  often  met  that  the  movement  of  rupee  ex- 
change rates  between  the  closing  of  the  mints  in  1893  and 
the  attainment  of  the  i6d.  par  in  1898  reflected  the  move- 
ment of  the  value  of  the  rupee  in  India,  that  is,  of  its  pur- 
chasing power  over  Indian  goods  and  services.  While 
there  are  forces  that  tend  to  cause  a  rough  correlation  be- 
tween the  two  movements,  the  price  movement  tends  to  lag 
behind  the  " exchange"  movement,  and  the  response 
is  particularly  slow  and  impeded  by  economic  friction  in  a 
country  like  India  with  its  isolated  communities  and  its 
respect  for  custom. 

Passing  over  the  fact  that  exchange  rates,  being  merely 
the  gold  price  in  England  of  the  right  to  one  rupee  in  India, 
or  the  amount  of  gold  in  England  one  could  obtain  for  one 
rupee  in  India  (either  at  once,  i.e.  cable,  or  after  a  stated 
period  of  time) ,  reflect  changes  in  the  value  of  gold  per  se  as 
well  as  changes  in  the  value  of  the  rupee1  per  se,  we  should 
note  that  gold  is  merely  one  of  many  commodities  whose 
price  is  expressed  in  the  value  of  the  rupee.  Furthermore, 
it  should  be  emphasized  that  gold,  which  is  a  commodity  of 
universal  demand,  easily  transferable,  and  with  a  highly 
organized  and  keenly  competitive  world  market,  is  one  of 
the  most  sensitive  of  commodities  in  its  price  movement. 
During  the  American  greenback  period,  when  the  greenback 
was  depreciating,  the  price  of  gold  and  the  rates  for  the  gold 
exchanges  were  the  first  to  rise  substantially,  and  rose 
farthest ;  and  when  the  greenback  began  to  return  toward 
par,  they  were  likewise  the  first  to  decline.  Wholesale 
prices,  retail  prices,  and  wages  lagged  behind  gold  in  the 
order  mentioned  both  on  the  upward  movement  and  the 
downward  movement.  The  greenback  price  of  gold  and 
gold  exchange  (as  long  as  the  exchanges  were  quoted  in 
greenbacks)  were  responsive  to  the  daily  rumors  and  to  the 

afford  no  satisfactory  basis  for  comparison  with  exchange  rates,  for  such  a 
brief  period,  in  order  to  determine  a 'useful  coefficient  of  correlation. 
1  Cf.  supra,  pp.  17-21. 


64  MODERN  CURRENCY  REFORMS 

temporary  successes  and  failures  of  the  Northern  cause, 
which  found  no  appreciable  response  in  the  more  lethargic 
prices  for  commodities  and  services.1  A  similar  situation 
appears  to  have  existed  in  India.  While  India's  exports 
and  imports  in  the  absolute  are  large,  still,  in  the  main, 
the  people  of  India  live  on  their  own  products,  and  a 
large  part  of  those  products  run  their  life  history  from 
production  to  consumption  in  a  very  small  territory. 
They  have  only  the  remotest  connection  with  foreign 
trade,  gold,  and  the  gold  exchanges.  In  time,  of  course, 
any  substantial  disturbance  in  the  equilibrium  of  values  in 
the  country's  import  and  export  trade  will  make  itself 
felt  in  these  local  prices,  but,  allowing  for  exceptions,  it 
may  be  said  that  in  a  country  like  India  the  influences  of 
such  disturbances  travel  very  slowly  and  lose  much  of  their 
momentum  in  traveling. 

In  the  articles  of  import  or  export  and  closely  related 
articles  the  response  of  prices  to  exchange  movements  is 
quicker  and  more  direct.  If  the  Indian  currency  is  con- 
tracted relative  to  trade  demands,  so  that  "  there  isn't 
enough  to  go  around"  at  the  old  prices,  a  few  of  the  more 
sensitive  commodities  in  which  there  is  keen  competition 
"give  way"  early,  and  among  these  gold  is  usually  the  first 
to  yield.  If  sterling  exchange  rises  from  14^.  to  15^.,  the 
Indian  exporter  of  cotton  yarns  who  has  sold  £1000  worth 
of  yarn  in  England  will  find  that,  although  he  is  selling  his 
yarns  for  the  same  gold  price  as  before,  he  now  is  receiving 
for  his  shipment  only  R.  16,000  whereas  formerly  he  re- 
ceived R.  17,140.  This  will  cut  into  his  profits,  perhaps 
lessen  his  production  and  export  of  yarn,  and  thereby  reduce 
his  demands  for  cotton  and  also  for  labor,  in  turn  tending 
to  push  down  the  price  of  raw  cotton  and  the  wages  in  the 
cotton  industry.  A  decline  in  the  exportation  of  yarn 
lessens  the  supply  of  sterling  bills  and  tends  to  force  down 

1  Cf.  W.  C.  Mitchell,  A  History  of  the  Greenbacks,  pp.  239-279;  also 
infra,  pp.  345  and  426-428. 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE    65 

exchange  rates.  On  the  other  hand,  an  advance  in  exchange 
from  iqd.  to  15^.  enables  the  importer  of  cotton  cloth  in 
India  to  buy  £1000,  with  which  to  pay  for  his  cloth  in 
England,  for  only  R.  16,000  instead  of  R.  17,140  as  for- 
merly, a  net  gain  which  stimulates  the  importation  of  cotton 
cloth,  and  tends  to  raise  the  foreign  price  of  such  cloth  and  to 
depress  the  Indian  price  of  cotton  cloth,  cotton  garments, 
etc.  While  the  abnormally  large  imports  of  cotton  cloth 
continue,  they  create  an  extra  demand  for  sterling  exchange 
and  tend  to  lower  the  rate,  thereby  destroying  the  extra 
exchange  profit  which  had  .been  the  stimulus  to  the  addi- 
tional imports.  In  this  way  prices  in  India  and  abroad 
tend  to  be  brought  into  equilibrium  with  each  other,  and 
home  prices  into  equilibrium  with  the  rupee  value  of  gold  as 
expressed  in  exchange  rates.  But  all  this  adjustment  takes 
time,  and,  in  a  country  like  India,  much  time.  New  forces 
are  continually  coming  into  operation,  and  a  condition  of 
static  equilibrium  is  never  reached.  This  lag  in  the  adjust- 
ment of  prices  in  India  is  shown  by  the  fact  that  the  Atkinson 
index  numbers  of  Indian  prices  fell  from  149  in  1897  to 
122  in  1898  and  117  in  1899,  although  the  i6d.  par  was  prac- 
tically reached  in  January  1898,  and  although  general  prices 
in  England  at  this  time  were  tending  upward ;  the  Sauer- 
beck index  numbers  having  increased  from  62  in  1897  to 
64  in  1898  and  68  in  1899. 

Although  there  is  a  tendency  to  an  inverse  correlation, 
with  a  lag,  between  exchange  rates  (when  quoted  in  terms 
of  the  foreign  money  as  are  sterling  rates  in  India)  and 
general  prices,  there  occasionally  arise  conditions  in  which 
temporary  forces  tend  to  pull  exchange  rates  and  general 
prices  in  the  same  direction.  For  example,  during  the 
famine  in  1897  the  Secretary  of  State,  to  relieve  the 
Indian  Government  of  a  drain  on  its  funds,  discontinued 
for  a  time  the  sale  of  council  bills,  thereby  forcing  up 
exchange  while  the  very  funds  that  would  have  normally 
been  released  from  Indian  treasury  vaults  and  injected 


66  MODERN  CURRENCY  REFORMS 

into  circulation  by  the  sale  of  the  council  bills  were  none 
the  less  put  into  circulation  by  government  expenditures 
for  famine  relief;  and  the  famine  was  dragging  millions 
of  rupees  into  circulation  from  the  hoarded  savings  of  the 
people.1 

Discount  Rates  1893-98 

There  was  much  complaint  of  the  high  discount  rates  in 
India  during  the  period  in  which  the  rupee  was  appreciating. 
A  superficial  examination  of  the  published  discount  rates 
of  the  period  1893-98,  in  comparison  with  those  of  the  pre- 
ceding five-year-period  and  the  succeeding  one,  fails  to 
show  the  rates  of  1893-98  to  have  been  exceptionally  high. 
Below  are  given  the  simple  averages  of  the  prevailing 
official  minimum  discount  rates  of  the  Presidency  Bank 
of  Bengal,2  by  half-year  periods,  for  the  five  years  pre- 
ceding the  closing  of  the  Indian  mints  (i.e.  July  i,  1888  to 
June  30,  1893),  the  five  years  during  which  the  rupee  was 
being  raised  to  the  gold  par  of  i6d.  (i.e.  July  i,  1893  to 
June  30,  1898),  and  the  five  years  succeeding  the  practical 
attainment  of  the  i6d. par  (i.e.  July  i,  1898  to  June  30, 1903) .3 

1  The  Indian  Financial  Statement  of  1898  (pp.  14-15),  after  referring  to  the 
demands  for  famine  relief  and  the  hostile  attacks  on  the  northern  frontier  in 
the  summer  of  1897,  said:    "These  demands  came  upon  us  at  the  most 
difficult  time  of  the  year,  so  far  as  the  supply  of  funds  is  concerned,  for  under 
ordinary  circumstances  our  cash  balances  .  .  .  run  down  throughout  the 
five  months,  July  to  November.    A  careful  reexamination  showed  that,  in 
the  face  of  the  new  demands  upon  us,  we  would  be  obliged  to  ask  the  Secre- 
tary of  State  to  greatly  reduce  his  drawings ;  and,  as  the  military  operations 
became  more  extensive,  he  not  only  stopped  them  altogether,  but  remitted 
back  to  us  a  crore  of  rupees  out  of  the  amounts  he  had  already  drawn." 

2  Professor  Keynes  refers  to  these  rates  as  the  rates  charged  day  by  day 
for  a  loan  advanced  on  such  security  as  government  paper,  the  interest  on 
which  is  calculated  day  by  day  at  the  published  rate  prevailing  on  each  day. 
"The  rates,  announced  by  the  three  Presidency  Banks,  are  not  always 
identical,  but  seldom,  if  ever,  differ  by  more  than  i  per  cent."     Keynes  refers 
to  these  Presidency  Banks  rates  "as  the  best  available  index  to  variations  in 
the  value  of  money  in  India."    J.  M.  Keynes,  Indian  Currency  and  Finance, 
pp.  240-242. 

3  These  average  minimum  rates  for  the  period  1888  to  1898  are  weighted 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE    67 


AVERAGE  DISCOUNT  RATES  AT  PRESIDENCY  BANK  or  BENGAL 
Half- Year  Periods 


1888-1893 


1893-1898 


1898-1903 


DATE 
1888   (2) 

RATE 

5-2 

DATE 
1893   (2) 

RATE 
4.1 

DATE 
1898  (2) 

RATE 
S-o 

1889   (i) 
1889   (2) 

9-3 

4-7 

1894   (i) 
1894   (2) 

7-3 
3-6 

1899   (i) 
1899  (2) 

6.2 

S-6 

1890   (i) 
1890   (2) 

8-3 
3-3 

1895   (i) 
1895   (2) 

3-6 

1900  (i) 
1900  (2) 

6.4 

4-2 

1891    (i) 
1891    (2) 

3-5 

2.6 

1896   (i) 
1896   (2) 

5-8 
5-6 

1901   (i) 
1901   (2) 

6.8 
4.1 

1892   (i) 
1892   (2) 

3-9 

1897   d) 
1897   (2) 

9.9 

6.0 

1902   (i) 
1902   (2) 

6.2 

3-6 

1893   (i) 

5-7 

1898   (i) 

II.O 

1903  (i) 

6-3 

Average  of  first 
half-years      .     6.1 

Average  of  sec- 
ond half-years  3.8 


Average  of  first 
half-years      .     7.8 

Average  of  sec- 
ond half-years  4.6 


Average  of  first 
half-years      .     6.4 

Average  of  sec- 
ond half-years  4.5 


Average  of  years     5.0        Average  of  years     6.2        Average  of  years    5.4 

These  figures  show  an  average  interest  rate  (6.2  per  cent) 
somewhat  higher  for  the  five-year  period  of  relative  con- 
traction, July  i,  1893  to  June  30,  1898,  than  for  the  pre- 
ceding five-year  period  (5  per  cent)  or  the  succeeding  one 
(5.4  per  cent) ;  but  this  difference  is  due  chiefly  to  the 
abnormally  high  rates  of  the  famine  period. 

The  actual  rates,  however,  of  the  currency  reform  period 

according  to  the  number  of  days  the  respective  rates  were  in  force,  and  were 
taken  from  Table  No.  14,  App.  II,  of  the  Fowler  Committee  Report.  The 
figures  for  the  years  1899  to  1903  represent  the  average  of  the  simple 
averages  of  the  rates  prevailing  during  each  month.  Those  for  the  years  1899 
and  1900  were  taken  from  the  chart  facing  p.  240  of  Keynes'  Indian  Currency 
and  Finance,  and  those  for  the  years  1901-03  were  computed  from  the  table 
given  in  App.  II  of  the  Report  of  the  Royal  Commission  on  Indian  Finance, 
1914,  p.  86. 


68  MODERN  CURRENCY  REFORMS 

are  higher  than  the  superficial  figures  show.  It  is  in  its 
purchasing  power  over  Indian  commodities  that  the  real 
value  of  the  rupee  should  be  measured,  and  the  fact  should 
not  be  overlooked  that  the  five-year  period  before  the  re- 
form and  the  five-year  period  following  the  reform  were 
both  periods  in  which  the  purchasing  power  of  the  rupee 
was  falling ;  while  the  period  of  the  reform  was  one  in  which 
it  was  rising.  In  other  words,  the  lender  during  the  first 
and  third  periods  was  usually  paid  back  his  principal  in  a 
less  valuable  rupee  than  he  loaned,  and  the  interest  itself 
each  year  was  paid  in  a  depreciating  unit.  To  compensate 
for  this  depreciation  in  the  money  unit  a  higher  interest 
rate  was  needed.  On  the  other  hand,  during  the  period 
of  appreciation  the  lender  tended  to  be  paid  both  principal 
and  interest  in  a  more  valuable  unit  than  he  loaned.  To 
compensate  for  this  appreciation  in  the  money  unit  a 
lower  interest  rate  was  needed.  From  1888  to  1893  the 
average  annual  interest  rate  was  5  per  cent.  The  average 
annual  depreciation  in  the  purchasing  power  of  the  rupee 
was  2.7  per  cent,1  which  reduced  the  " purchasing  power 
interest  rate"  or  "commodity  interest  rate"  to  an  average 
of  approximately  2.3  per  cent.  From  July  i,  1898  to 
July  i,  1903  the  average  annual  interest  rate  was  5.4  per 
cent;  and  for  the  period  January  i,  1898  to  January  i, 
1903  the  average  annual  depreciation  of  the  rupee  was  1/3 
of  i  per  cent,  making  the  purchasing  power  interest  rate 
average  for  the  five-year  period  slightly  over  5  per  cent. 
For  the  period  of  appreciation  1893-98  the  average  annual 
rate  was  6.2  per  cent,  and  the  average  annual  appreciation 
of  the  rupee  was  approximately  .  5  per  cent,  giving  an  aver- 
age annual  commodity  interest  rate  for  the  period  of 
approximately  6.7  per  cent. 
As  the  result  of  the  careful  studies  of  Professor  Irving 

1  The  Atkinson  index  numbers  for  prices  in  India  increased  from  108  in 
1888  to  125  in  1893,  showing  a  depreciation  of  the  rupee  for  the  five  years  of 
13.6  per  cent. 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE    69 

Fisher,  we  know  that  a  long  period  of  relative  contraction 
of  the  currency  is  likely  to  depress  industry  through  forcing 
down  prices,  and  thereby  to  lessen  the  demand  for  capital  and 
depress  interest  rates.  Furthermore,  whenever  the  lending 
and  borrowing  public  are  conscious  to  any  considerable 
extent  of  an  artificial  "raising"  of  the  money  unit,  as  they 
were  in  India  from  1895  to  1898,  there  is  likely  to  be,  to  a 
small  extent,  a  conscious  allowance  for  the  appreciation  of 
the  money  unit  in  the  fixing  of  interest  on  long-time  loans. 
For  India,  however,  the  period  of  actual  appreciation  was 
too  short  and  too  uncertain  to  give  these  forces  full  play. 
Even  in  such  times,  moreover,  when  the  interest  rate  on 
long-time  obligations  is  tending  downward,  the  restraints 
and  uncertainties  of  a  period  of  relative  currency  con- 
traction are  very  likely  to  lead  to  decided  fluctuations 
in  the  rates  on  short-time  bank  loans.  This  was  the 
experience  of  the  United  States  between  1865  and  1879, 
when  the  greenback  was  appreciating,  and  may  explain 
in  part  the  instability  of  the  interest  rate  in  India  during 
the  period  1893-98. 

While  of  course  capital  and  money  are  not  the  same  thing, 
still  money  is  an  important  part  of  capital,  and  it  is  through 
the  form  of  money  or  rights  to  draw  money  on  demand  that 
loans  of  capital  goods  are  usually  made.  A  period  therefore 
in  which  the  currency  supply  is  being  reduced  relatively 
to  trade  demands  is  likely  to  be  a  period  in  which  funds 
loanable  on  short  maturities  will  not  readily  be  forthcoming 
to  meet  exceptional  though  temporary  demands. 

When  one  notes  the  irregularity  of  the  interest  rate  move- 
ments of  these  periods,  and  of  the  price  movements  during 
the  second  and  third  periods,  also  the  short  duration  of 
the  period  of  appreciation,  and  the  artificial  conditions  pre- 
vailing during  the  latter  part  of  it  arising  from  famine  and 
border  warfare,  he  is  precluded  from  drawing  any  safe  in- 
ferences from  the  data  available  as  to  the  influence  of  rela- 
tive contraction  upon  the  interest  rate. 


70  MODERN   CURRENCY  REFORMS 

Absolute  or  Merely  Relative  Contraction  of  Currency, 


There  has  been  much  discussion  among  students  of 
Indian  currency  concerning  the  question  whether  between 
1893  and  1898  there  was  any  actual  contraction  of  the  cur- 
rency or  not.  Elaborate  and  ingenious  calculations  have 
been  made  of  the  amounts  of  money  in  circulation  at  the  be- 
ginning and  at  the  end  of  this  period.1  Into  this  controversy 
we  need  not  go.  The  important  question  is  not  whether 
there  was  an  actual  contraction  of  the  currency  or  not, 
but  whether  there  was  a  contraction  relative  to  trade  de- 
mands. In  the  absence  of  any  even  remotely  satisfactory 
indices  of  the  growth  of  business  in  India  during  this  period, 
i.e.  of  the  variations  in  the  demand  for  money,  speculations 
as  to  the  net  amounts  of  money  withdrawn  from  hoards, 
imported  from  abroad  and  from  the  native  states,  amounts 
melted  down,  etc.,  seem  largely  gratuitous.  Furthermore, 
we  have  no  evidence  as  to  variations  in  the  efficiency  of 
money  in  India  as  expressed  in  rates  of  monetary  turnover, 
and  no  adequate  information  concerning  variations  in  the 
circulation  of  deposit  currency  and  in  the  proportion  of 
bank  reserves  to  deposit  circulation. 

If  the  law  of  supply  and  demand  in  its  application  to 
money  needs  to  be  subjected  to  an  inductive  test,  that 
test  may  best  be  made  in  some  advanced  country  like  the 
United  States,2  where  a  moderate  amount  of  roughly  reli- 
able data  are  available,  rather  than  in  a  country  like  India, 
where  the  data  for  such  a  study  are  grossly  inadequate. 
The  presumption  is  strong  that  the  law  of  supply  and  de- 
mand applied  to  currency  conditions  in  India  during  the 

1  For  a  brief  summary  of  different  investigations  of  the  rupee  circulation, 
with  criticisms  and  citations  of  sources,  see  Keynes,  Ind.  Cur.  and  Fin.,  pp. 


2  For  two  such  tests  see  E.  W.  Kemmerer,  Money  and  Credit  Instruments 
in  Their  Relation  to  General  Prices,  second  edition,  Book  II;  and  Irving 
Fisher,  The  Purchasing  Power  of  Money,  pp.  276-318. 


RAISING  THE  RUPEE  TO  A  GOLD  VALUE  OF  16  PENCE    71 

period  under  investigation  and  that  the  appreciation  of  the 
rupee  during  the  period  1893-98  (exclusive  of  the  famine 
period)  was  due  to  the  fact  that  the  monetary  demand  in- 
creased more  rapidly  than  the  money  supply.  This  is  what 
is  meant  by  relative  contraction.  The  burden  of  the  proof 
is  upon  those  who  deny  the  application  of  the  apparently 
universal  law  of  supply  and  demand  to  the  value  of  one 
commodity,  i.e.  money.  To  disprove  it,  in  the  case  of 
India,  they  must  not  only  satisfactorily  measure  the  vari- 
ations in  India's  monetary  supply  for  the  period  1893-98, 
but  also  those  in  her  monetary  demand. 


CHAPTER   IV 

THE  FOWLER  COMMITTEE'S  INVESTIGATION  AND  REPORT 

Now  that  we  have  considered  the  chief  facts  of  the  period 
of  transition  from  the  silver  standard  to  a  quasi-gold  stan- 
dard, we  may  proceed  to  a  consideration  of  the  efforts  to 
clinch  the  new  gold  par  and  place  India  definitely  and  per- 
manently upon  the  gold  basis.  The  various  plans  proposed, 
and  the  policies  subsequently  adopted,  were  formulated  in 
the  investigation  and  report  of  the  Indian  Currency  Com- 
mittee of  1898,  i.e.  the  "Fowler  Committee." 

Indian  Government's  Proposals  for  Stabilizing  Exchange 

The  Indian  Government  on  March  3,  1898  sent  a  long 
communication  to  the  Secretary  of  State  for  India  laying 
down  a  program  for  future  action  as  regards  Indian  cur- 
rency.1 This  communication  refers  to  "the  pressing  neces- 
sity of  taking  active  measures  to  secure  the  stability  of 
exchange  which  was  the  main  object  of  the  policy  adopted 
in  June  1893."  It  said  that  "Our  experience  since  1893 
has  put  beyond  doubt  one  of  the  main  principles  upon  which 
the  legislation  of  that  year  was  based  —  a  principle  which 
was  challenged  at  the  time  —  namely,  that  a  contraction  in 
the  volume  of  our  silver  currency,  with  reference  to  the 
demands  of  trade,  has  the  direct  effect  of  raising  its  ex- 
changeable value  in  relation  to  gold."  2 

The  difficulty  of  clinching  the  new  par  and  stabilizing 
exchange  were  discussed,  and  also  the  evils  of  the  existing  in- 

1  Correspondence  Relating  to  Proposals  on  Currency  Made  by  the  Govern- 
ment of  India,  Cd.  8840  of  1898,  pp.  2-11. 
3  Ibid.,  p.  2. 

72 


THE  FOWLER  COMMITTEE'S  INVESTIGATION  73 

stability  and  uncertainty.  "Under  these  circumstances, " 
the  Government  said,  "we  believe  that  it  will  be  wiser  not 
to  pursue  a  course  of  inaction  which  may  be  prolonged  in- 
definitely, and  that  it  is  desirable  in  the  interests  of  the  state 
and  of  the  mercantile  community  to  terminate  the  period 
of  transition  without  further  delay."  1  The  Indian  Govern- 
ment's proposal  was  to  establish  a  gold  reserve  by  means 
of  borrowing,  and  then  to  withdraw  from  circulation  and 
melt  down  a  sufficient  quantity  of  rupees  to  raise  the  gold 
value  pf  the  rupee  to  i6d.  The  reserve  would  be  aug- 
mented by  the  sale  of  the  silver  bullion  obtained  from  the 
melting  down  of  the  rupees.  Exchange  was  to  be  main- 
tained at  the  1 6d.  rate  by  the  confidence  the  reserve  would 
inspire  and  by  the  actual  redemption  of  rupees  in  sovereigns 
at  the  i6d.  rate. 

The  Fowler  Committee 

About  a  month  after  the  receipt  of  the  above  communica- 
tion from  the  Indian  Government  the  Secretary  of  State 
for  India  appointed  a  committee  of  eleven  men,  of  which 
Henry  H.  Fowler  was  Chairman,  to  make  a  report  on  the 
whole  subject  of  Indian  currency.  The  Committee  held  43 
meetings,  examined  49  witnesses,  and  in  other  ways  col- 
lected a  large  amount  of  evidence  on  the  subject.  Its  re- 
port with  the  testimony  and  other  evidence  was  submitted 
to  the  Secretary  of  State  for  India,  July  7,  1899. 

The  investigation  showed  much  difference  of  opinion  to 
exist.  Speaking  broadly,  there  were  four  main  proposals : 
(i)  to  adopt  bimetallism ;  (2)  to  return  to  the  silver  stand- 
ard ;  (3)  to  adopt  a  form  of  the  gold  standard  without  gold 
coin  in  circulation ;  (4)  to  go  directly  upon  the  gold  stand- 
ard, with  gold  coin  in  circulation,  either  by  the  method 
suggested  by  the  Indian  Government  or  by  some  other 
method.  Let  us  consider  each  of  these  proposals,  paying 

1  Ibid.,  p.  5. 


74  MODERN  CURRENCY  REFORMS 

particular  attention  to  the  third,  which  was  the  stone  the 
builders  rejected  but  was  later  to  become  the  head  of  the 
corner. 

Bimetallism 

At  the  time  of  the  appointment  of  the  Herschell 
Committee,  in  1892,  there  was  a  very  strong  sentiment 
among  people  familiar  with  Indian  currency  problems 
in  favor  of  international  bimetallism  as  the  solution  of 
India's  currency  troubles.  It  was  because  the  attainment 
of  an  international  agreement  seemed  hopeless  that  India 
had  accepted  her  second  choice  and  had  closed  her  mints 
in  1893.  During  the  following  years  there  had  been  a  re- 
vival of  sentiment  in  Europe  and  America  in  favor  of  in- 
ternational bimetallism.  The  subject  of  free  coinage  had 
been  the  campaign  issue  in  the  United  States  in  1896,  one 
party  favoring  national  bimetallism  if  an  international 
agreement  could  not  be  obtained,  and  the  other  being  op- 
posed to  national  bimetallism  but  favoring  a  renewal  of  the 
attempt  to  secure  international  bimetallism.  The  Republi- 
can Party  had  won,  and,  following  its  platform  pledge,  had 
appointed  a  commission  known  as  the  Wolcott  Commission, 
from  the  name  of  its  chairman,  Senator  E.  O.  Wolcott,  to 
confer  with  representatives  of  European  countries  on  the 
subject  of  an  international  bimetallic  agreement.  France 
was  in  favor  of  cooperating  with  the  United  States  on  the 
basis  of  a  ratio  of  15!  to  i,  and  the  English  Government, 
being  at  the  time  under  the  influence  of  men  favorably  dis- 
posed toward  bimetallism,  appeared  favorable  to  the  pro- 
position of  India's  joining  with  France  and  the  United 
States  in  such  an  agreement.  England  seemed  disposed 
also  on  her  own  account  to  make  certain  concessions  to  silver. 
In  fact  she  took  a  much  more  favorable  stand  toward 
bimetallism  than  she  had  taken  in  any  of  the  earlier  negotia- 
tions.1 When  the  proposals  were  submitted  to  India,  how- 

1  "We  will  re-open  the  Indian  mints,  we  will  engage  that  they  shall  be 
kept  open,  and  we  shall  therefore  provide  for  a  free  coinage  of  silver  within 


THE   FOWLER  COMMITTEE'S  INVESTIGATION  75 

ever,  the  Indian  Government,  much  to  the  surprise  of  bimet- 
allists,  rejected  them.  This  it  did  largely  because  they 
seemed  to  require  a  ratio  of  15!  to  i  or  1 6  to  i,  whereas  her 
new  ratio  was  22  to  i,  and  the  readjustment  to  such  a  low 
ratio,  through  the  increased  gold  value  it  would  give  the 
rupee,  seemed  likely  to  cause  great  disturbances  in  Indian 
business  and  finance.  To  further  experimentation  in  the 
line  of  currency  reform  the  Indian  Government  was  natu- 
rally not  favorably  disposed  at  a  time  when  the  country  was 
suffering  grievously  from  famine  and  border  warfare,  and 
was  only  beginning  to  see  light  in  the  currency  reform  she 
had  undertaken  a  few  years  before.1 

In  1898,  however,  there  were  still  many  who  believed  that 
the  best  solution  for  India's  currency  difficulties  was  an 
international  bimetallic  agreement,  and  who  held  that 
India  had  rejected  the  proposals  of  the  Wolcott  Com- 
mission too  quickly  and  without  adequate  consideration. 
They  believed  that  a  compromise  on  the  ratio  difficulty 
would  have  been  possible  between  India,  France,  and  the 
United  States,  and  even  hoped  that  a  renewal  of  negotia- 
tions might  lead  to  a  satisfactory  bimetallic  agreement. 

Concerning  those  who  advocated  delay  in  going  definitely 
to  the  gold  standard  in  order  that  an  international  bimetallic 
agreement  might  be  reached,  the  Fowler  Committee  con- 
fined itself  to  stating  "that,  the  negotiations  of  1897  with 
France  and  the  United  States  of  America  having  proved 
fruitless,  no  fresh  proposals,  so  far  as  we  are  aware,  have 
been,  or  are  being,  made  by  any  of  the  governments  con- 
cerned." 2 


the  limits  of  the  British  Empire  for  a  population  greater  in  number  than 
the  population  of  Germany,  France,  and  America  put  together."  Mr. 
Balfour,  First  Lord  of  the  Treasury.  Cf.  Fowler  Com.  Rep  .  Evidence,  Q. 
11650. 

1  For  a  brief  account  of  the  Wolcott  Commission's  activities  and  the  atti- 
tude of  India  toward  its  proposals,  see  Henry  B.  Russell,  International 
Monetary  Conferences,  pp.  459-463. 

2  Fowler  Com.  Rep.,  sec.  19. 


76  MODERN  CURRENCY  REFORMS 


Return  to  Silver  Standard 

In  the  evidence  and  testimony  submitted  to  the  Fowler 
Committee  much  was  said  in  favor  of  a  return  to  the  silver 
standard.1  Such  a  policy  was  more  particularly  favored 
by  persons  interested  in  India's  export  trade,  who  believed, 
for  the  reasons  hereafter  discussed,2  that  a  rising  exchange 
was  unfavorable  to  export  trade,  and  especially,  that  it 
handicapped  India  in  its  competition  with  China  and  other 
silver  standard  countries  for  European  markets.3  The  con- 
dition of  India's  foreign  trade  during  the  period  of  the  "rais- 
ing" of  the  rupee,  however,  had  been  so  abnormal,  because 
of  the  famine  and  other  troubles,  that  no  additional  evidence 
of  value  in  support  of  their  conclusion  could  be  offered. 
Moreover,  it  was  clear  that  were  the  mints  to  be  reopened 
there  would  be  a  great  fall  in  exchange,  accompanied  of 
course  by  a  rise  in  silver,  and  that  this  fall  in  exchange 
would  cause  great  disturbance  to  business,  to  equities  as 
between  debtor  and  creditor,  and  to  the  government 
finances.  Obviously,  if  such  a  policy  should  become  at  all 
probable,  there  would  be  a  rush  to  withdraw  capital  from 
India  before  the  anticipated  decline  in  exchange  should 
take  place  —  a  rush  which  would  of  itself  cause  an  abrupt 
fall  in  exchange  rates.4  This  latter  danger  was  a  serious 
defect  in  the  scheme  proposed  by  some  of  returning  to  a 
silver  basis  gradually.  H.  D.  MacLeod  referred  to  the  pro- 

1  Cf.,  for  example,  testimony  of  W.  H.  Cheetham,  Fowler  Com.  Rep. 
Evidence,  Qs.  8685-8692. 

2  Infra,  pp.  479-483.     Cf.  also  supra,  pp.  24-28. 
8  Cf.  Fowler  Com.  Rep.,  sec.  20. 

4  Sir  John  Lubbock  favored  the  reopening  of  the  mints  to  the  free  coinage 
of  silver,  but  proposed  to  protect  the  rupee  by  increasing  the  import  duty 
on  silver,  and  by  imposing  a  high  seigniorage  charge  on  coinage ;  these  two 
measures,  coupled  with  the  appreciation  of  silver  which  he  thought  the  re- 
opening of  the  mints  would  cause,  he  believed  would  prevent  any  undue 
depreciation.  Ibid.,  Evidence,  Qs.,  11084-11086,  11155-11158.  Cf.  also 
Testimony  of  Thomas  North  Christie  and  W.  M.  Leake,  Qs.  4424-4581,  and 
4870-4877. 


THE  FOWLER  COMMITTEE'S  INVESTIGATION          77 

posal  for  reversing  the  policy  of  1893  and  reopening  the 
mints  as  "  little  short  of  madness."  1  The  proposal  was 
unanimously  rejected  by  the  Fowler  Committee. 

A  Gold  Standard  Without  a  Gold  Currency 

Various  proposals  were  made  favoring  a  gold  standard 
without  a  gold  currency.  The  advocates  of  these  schemes 
in  general  maintained  that  silver  was  better  suited  to 
India's  domestic  currency  needs  than  gold,  and  that  if  a 
mechanism  could  be  devised  whereby  rupees  and  rupee 
notes  could  continue  to  be  the  currency  of  domestic  trade, 
but  could  be  maintained  at  a  parity  with  gold  through  a 
mechanism  that  would  make  possible  the  settlement  of 
trade  balances  with  other  countries  in  gold,  India's  needs 
would  be  most  effectively  and  economically  met.  To  this 
end  the  two  most  important  plans  recommended  were 
the  Probyn  Plan  and  the  Lindsay  Plan. 

The  Probyn  Plan.  This  plan  was  advocated  by  Mr. 
Lesley  C.  Probyn,  who  had  been  in  the  Indian  government 
service  for  twenty-five  years  ending  with  1879,  his  last 
post  having  been  that  of  Accountant  General  of  Madras. 
The  Probyn  Plan  was  suggested  to  the  Gold  and  Silver  Com- 
mission as  early  as  1886,  and  was  formulated  in  considerable 
detail  in  a  paper  read  by  Mr.  Probyn  before  the  East  India 
Association  in  June  1888  ;  later,  in  1892  in  a  paper  read 
before  the  Institute  of  Bankers,  2  in  1894  in  a  paper  read 
before  the  East  India  Association,  and  in  1895-96  in  papers 
published  in  the  Asiatic  Quarterly  Review.  In  its  various 
formulations  the  Plan  was  revised,  and  was  finally  pre- 
sented to  the  Fowler  Committee  in  the  testimony  of  Mr. 
Probyn  of  July  18,  i898.3  It  is  from  this  last  formulation 
that  the  following  description  is  chiefly  drawn. 


.,  Q.  12932. 

2  These  papers  have  been  reprinted  by  Probyn  in  his  book  on  Indian 
Coinage  and  Currency,  op.  cit. 

"Fowler  Com.  Rep.,  Evidence,  Qs.  6818-7055. 


78  MODERN  CURRENCY  REFORMS 

Mr.  Probyn  claimed  that  a  gold  currency  in  India  was 
"not  only  unnecessary  but,  in  the  first  instance,  at  any  rate, 
undesirable.  ...  If  gold  coins  were  put  into  circulation 
the  temptation  to  hoard  them  and  to  use  them  as  ornaments 
would  be  very  great.  ...  If  gold  coins  were  passed  into 
the  currency  it  would  be  at  first  almost  like  pouring  water 
into  a  sieve."  * 

His  Plan  contemplated  the  introduction  of  a  new  govern- 
ment note  to  be  issued  in  the  denomination  of  R.  10,000 
and  in  exchange  for  gold.  Notes  of  smaller  denominations 
were  to  be  issued  in  exchange  for  gold  or  for  silver  rupees, 
but  at  first  were  to  be  redeemable  only  in  silver  rupees.  As 
trade  demands  increased,  exchange  would  rise  to  the  gold 
import  point  and  gold  would  be  presented  at  the  currency 
reserve  offices,  at  first  probably  against  the  issue  of  the 
large  gold  notes. 

"But  gradually,  as  need  arose,  gold  would  come  against 
the  issue  of  smaller  notes,  thus  practically  freeing  the  silver 
rupees  held  in  the  currency  reserve.  And  this  process  of 
the  expansion  of  the  rupee  currency  to  meet  the  wants 
of  the  people  would  go  on  automatically.  .  .  .  There 
would  be  no  power  to  touch  this  gold  reserve,  except  for  .  .  . 
restricted  silver  coinage,  and  if  the  currency  gradually  ex- 
panded without  a  contraction  of  the  paper  issue,  the  gold 
reserve  would  gradually  rise.  The  scheme  prohibits  gold 
coinage,  and  though  it  does  not  prevent  the  receipt  of 
gold  at  government  treasuries,  it  does  not  provide  for 
gold  (except  the  large  io,ooo-rupee  notes)  being  legal  tender. 
Provision  is  made  that  when  any  further  coinage  of  silver 
rupees  takes  place,  the  difference  between  the  nominal  and 
intrinsic  gold  values  of  the  silver  coins  shall  be  added  to  the 
gold  reserve.  The  scheme  empowers,  but  does  not  require, 
the  Government,  after  the  gold  in  the  reserve  (other  than 
in  the  gold  note  reserve)  has  continuously  for  one  year 
been  more  than  silver,  to  notify  that  gold  will  be  always 
given  in  exchange  for  rupees  or  notes  presented  for  the 

1  Fowler  Com.  Rep.,  Evidence,  Q.  6849. 


THE  FOWLER  COMMITTEE'S  INVESTIGATION  79 

purpose  in  parcels  of  10,000  rupees.  When  the  Govern- 
ment is  able  to  issue  such  a  notification,  a  perfect  gold 
standard  will  have  been  attained."  1 

The  Probyn  scheme  was  not  favorably  received  either  by 
the  Indian  Government  or  by  the  Fowler  Committee.  In 
commenting  upon  the  proposal  the  Indian  Government  said  : 

"We  do  not  think  it  either  desirable  or  necessary  that  gold 
coins  should,  until  the  gold  standard  has  for  some  time  been 
established,  pass  to  any  appreciable  extent  into  general 
circulation.  .  .  .  But  we  do  not  think  it  necessary  ...  to 
refuse  to  have  legal  tender  gold  coins  of  a  convenient  value. 
We  are,  moreover,  not  satisfied  that  there  would  be  any 
smaller  disappearance  into  hoards  of  the  gold  bars,  which 
would  be  easy  to  subdivide,  than  of  gold  coins.  We  are 
also  of  opinion  that  the  simpler  and  more  direct  a  monetary 
standard  can  be  made,  the  more  acceptable  it  will  be  to  the 
public.  We  think  that  the  only  state  of  things  which  can 
be  called  a  thoroughly  satisfactory  attainment  of  a  gold 
standard  is  one  in  which  the  gold  coins  which  represent 
our  standard  are  those  also  which  are  good  for  payments 
in  England."  2 

The  Fowler  Committee  objected  to  the  plan  on  the  ground 
that  there  was  no  successful  European  or  Indian  precedent 
in  support  of  such  a  use  of  gold  bullion,  and  that  the  danger 
of  gold  coin  being  hoarded  in  India  in  large  quantities  was 
exaggerated.  "The  habit  of  hoarding,"  therefore,  the 
Committee  declared,  "does  not  present  such  practical  diffi- 
culties as  to  justify  a  permanent  refusal  to  allow  India  to 
possess  the  normal  accompaniment  of  a  gold  standard, 
namely,  a  gold  currency."  3 

The  Lindsay  Plan.  Of  much  greater  importance  was  the 
second  plan  for  securing  a  gold  standard  without  a  gold 

1  Ibid.,  Q.  6858. 

2  Letter  to  Secretary  of   State  for  India,  March  3,  1898,  in  Correspon- 
dence respecting  Proposals  on  Currency  Made  by  the  Government  of  India 
Cd.  8840  of  1898,  p.  10. 

8  Fowler  Com.  Rep.,  sec.  51. 


80  MODERN  CURRENCY  REFORMS 

currency.  This  Plan,  which  provided  for  a  system  of  re- 
demption in  drafts  on  a  gold  fund  located  outside  of  the 
country,  was  named  after  its  chief  advocate,  A.  M.  Lindsay, 
deputy  secretary  and  treasurer  of  the  Bank  of  Bengal.  It 
appears  to  have  been  first  proposed  for  India  by  Mr.  Lind- 
say in  1876.  It  was  discussed  by  him  in  the  Calcutta 
Review  for  October  1878,  and  July  1885  ;  also  in  the  Bankers' 
Magazine  (London)  of  August  and  September  1892.  In  the 
latter  month  Mr.  Lindsay  published  a  pamphlet  on  the 
subject,  entitled  Ricardo's  Exchange  Remedy,  a  Proposal  to 
Regulate  the  Indian  Currency  by  Making  it  Expand  and 
Contract  Automatically  at  Fixed  Sterling  Rates  with  the  Aid 
of  the  Silver  Clause  of  the  Bank  Act.1  The  scheme  was 
described  and  supported  by  Charles  MacDonald  in  Novem- 
ber 1892,  in  his  testimony  before  the  Herschell  Committee, 
and  was  briefly  mentioned  among  " various  schemes" 
in  the  Herschell  Committee's  Report.2 

The  basic  principle  of  his  plan  Lindsay  claimed  he  drew 
from  Ricardo's  recommendations  for  the  resumption  of  gold 
payments  by  the  Bank  of  England  through  the  redemp- 
tion of  its  notes  in  gold  bullion  —  a  form  of  gold  which 
would  not  circulate.3  Referring  to  Ricardo's  proposal 
and  its  subsequent  enactment  into  law,4  Lindsay  said : 

"The  currency  at  that  time  was  based  on  inconvertible 
notes  of  the  Bank  of  England,  and  Mr.  Ricardo  suggested 

xThis  pamphlet  of  36  pages  was  published  in  London  by  Effingham 
Wilson  &  Co. 

2  Herschell  Com.  Rep.,  sec.  144,  and  Evidence,  Qs.  579-584,  589-592. 

3  Cf.  Ricardo,  Proposals  for  an  Economical  and  Secure  Currency,  etc., 
especially  chapter  4.     Published  in  McCulloch's  edition  of  Ricardo's  Works. 

4  The  law  of  1819  provided  that  the  Acts  restraining  cash  payments  by 
the  Bank  were  to  be  continued  until  May  i,  1823,  at  which  date  they  were 
to  cease;    that  between  February  i  and  October  i,  1820,  the  Bank  should 
pay  all  notes  presented  to  it  at  the  rate  of  an  ounce  of  gold  for  each  £4  is. 
(the  par  rate  being  £3   175.   lof  d.) ;  between  October  i,  1821,  and  May  i, 
1821  the  rate  should  be  £3  195.  6d. ;  and  between  May  i,  1821,  and  May  i, 
1823  the  rate  for  gold  bullion  should  be  £3  175.  io^d.     Statutes  of  Realm, 
Vol.  LIX,  p.  156 ;  cf.  also  Andreades,  History  of  Bank  of  England,  p.  241. 


THE  FOWLER  COMMITTEE'S  INVESTIGATION  8 1 

that  stability  in  the  foreign  exchanges  might  be  secured 
and  all  legitimate  requirements  met  by  the  simple  and  eco- 
nomical expedient  of  arranging  that  the  Bank  of  'England 
should  sell  its  paper  money  at  a  fixed  gold  price,  and  buy 
back  the  notes  when  desired  at  ij  per  cent  below  that 
price,  the  gold  employed  to  be  in  the  shape  of  gold  bars 
or  any  other  form  that  would  prevent  its  being  used  as 
a  medium  of  local  payment.  He  said  a  currency  is  in  its 
most  perfect  state  when  it  consists  of  cheap  material,  but 
of  cheap  material  of  an  equal  value  with  the  gold  which 
it  professes  to  represent ;  and  he  added  that  a  currency  of 
this  description  might  be  equally  well  issued  by  a  Govern- 
ment as  by  a  Bank.  .  .  . 

"  This  proposition  of  Mr.  Ricardo  was  recommended  by 
the  Committee  of  the  House  of  Lords  and  Commons  ap- 
pointed in  1819,  to  consider  the  expediency  of  the  Bank  of 
England  resuming  gold  payments,  and  was  afterwards 
adopted  on  a  temporary  footing  in  the  Bill  for  their  resump- 
tion, introduced  by  Sir  Robert  Peel.  From  ist.  February, 
1820,  to  ist  May,  1823,  the  value  of  our  paper  currency 
was  raised  gradually  and  successfully  from  its  degraded 
position  to  the  old  fixed  standard  of  £3  17$.  io^d.  paper 
money  to  the  ounce  of  gold,  by  making  the  notes  convertible 
into  gold  bars,  that  could  not  be  used  in  the  internal  circu- 
lation. This  short  trial  is  the  only  one  ever  given  to  Ri- 
cardo's  scheme,  and  it  passed  through  the  ordeal  satis- 
factorily. The  arrangement  appears  to  be  in  every  respect 
a  suitable  precedent  for  the  Government  of  India  to  follow, 
as  a  temporary  expedient  at  all  events ;  and  it  is  the  duty 
of  the  Indian  authorities  to  consider  carefully  whether 
this  scheme  of  currency,  which  was  devised  by  our  greatest 
currency  authority,  not  merely  as  a  temporary  remedy, 
but  as  a  permanent  measure  of  reform,  should  not  be 
adopted  in  India  on  a  permanent  footing."  1 

Inasmuch  as  the  Lindsay  Plan  and  the  currency  problem  it 
was  formulated  to  solve  underwent  modifications  during 
the  period  between  the  Plan's  original  formulation  and  its 

1  Ricardo's  Exchange  Remedy,  pp.  6-7. 


82  MODERN  CURRENCY  REFORMS 

advocacy  before  the  Fowler  Committee  in  1898 ;  and  since 
the  limits  of  this  paper  will  not  permit  a  discussion  of  the 
historical  development  of  the  Plan,  it  will  be  advisable  to 
examine  it  in  the  form  described  by  Mr.  Lindsay  in  1898.* 

"When  formulating  this  scheme,  years  ago,"  said  Lind- 
say, "I  based  it  on  the  legislation  of  1819,  but,  simply  for  the 
sake  of  convenience  and  economy,  I  substituted  sterling 
drafts  on  London  for  the  gold  bars  of  the  Ricardo  plan.  It 
was  with  pleasure  that  I  discovered,  last  year,  that  the 
sterling  draft  system  had  been  in  operation  in  Scotland 
for  40  years,2  and  had  been  recommended  for  adoption 
in  Ireland  by  a  strong  parliamentary  committee  in 
1804."  3 

The  Lindsay  Plan,  which  has  since  received  the  name  of 
the  "Gold-Exchange  Standard,"  provided  for  the  im- 
mediate accumulation  by  the  Indian  Government  through  a 
long-time  loan  (say  for  15  years)  of  £i  0,000,000 .4  This 
was  to  constitute  a  gold  standard  reserve  fund,  most  of 
which  should  be  kept  on  deposit  by  the  Government  of 
India  in  London,  preferably  in  the  Bank  of  England,  but 
part  of  which  should  be  kept  in  rupees  in  government 
treasury  offices  in  India  —  some  in  Bombay  and  some  in 

1  Fowler  Com.  Rep.,  Evidence,  Qs.  3275-4303. 

2  "After  the  Peace  of  Versailles  in  1763,  a  great  scarcity  of  gold  was  ex- 
perienced in  Scotland.  .  .  .     Exchange  with  London  fluctuated  5  or  6  per 
cent,  and,  in  order  to  fix  exchange  and  frustrate  the  attempts  of  speculators, 
the  Scotch  banks  established  a  gold  fund  in  the  Bank  of  England ;  and,  by 
offering  drafts  on  London  at  \  to  i  per  cent  over  the  speculators '  rate,  they 
gradually  brought  the  exchange  to  par,  and  with  the  aid  of  this  conversion 
fund  they  maintained  exchange  at  this  level  up  to  1804,  and  until  gold  coins 
were  again  used."    Lindsay,  Fowler  Com.  Rep.,  Evidence,  Q.  3360. 

3  Ibid.,  Q.  3359. 

4  Lindsay  believed  that  this  reserve  could  be  reduced  to  £5,000,000  if 
the  Government  would  impose  a  prohibitive  duty  on  the  importation  of 
silver,  which  he  favored.     He  believed  that  the  recent  heavy  imports  of 
silver  were  used  largely  for  the  illicit  coinage  of  rupees  of  the  Native  States, 
and  that  these  counterfeit  coins  circulated  "on  large  tracts  of  territory  that 
border  these  Native  States  all  through  India,  and  displace  British  rupees, 
thereby  creating  a  redundancy  of  the  British  rupee  currency."     Ibid.,  Qs. 
3399,  4076-4078,  4219-4231. 


THE  FOWLER  COMMITTEE'S  INVESTIGATION  83 

Calcutta.1  This  fund  was  to  be  a  separate  and  trust  fund 
to  be  used  only  for  the  purpose  of  maintaining  the  parity 
of  the  rupee  with  sterling  at  the  rate  of  i6d.  to  the  rupee.2 
The  Government  was  to  offer  to  sell  on  demand  both  in 
Bombay  and  Calcutta  drafts  on  the  gold  standard  reserve 
in  London  for  sums  of  £1000  and  upwards,  at  the  fixed 
rate  of  i$%d.  to  the  rupee;  and  in  London  to  sell,  on  de- 
mand, drafts  on  Bombay  and  Calcutta  for  sums  of  15,000 
rupees  and  upwards,  at  the  fixed  rate  of  i6^d.  to  the 
rupee.3  The  Indian  rate  of  15!^.  was  supposed  to  repre- 
sent approximately  the  gold-export  point  of  India.  In  other 
words,  it  was  assumed  that,  if  India  were  placed  upon  a 
gold  standard  with  gold  coins  in  circulation,  the  expenses 
involved  in  securing  gold  in  India  and  shipping  it  (in 
large  sums)  from  Calcutta  to  London  would  be  about  \d. 
for  each  i6d.  Under  a  strict  gold  standard  therefore 
London  demand  exchange  could  drop  to  15!^.,  and  no 
further ;  for  at  that  rate  gold  would  be  exported,  the  cur- 
rency supply  would  be  reduced,  and  the  further  decline 
in  exchange  would  be  stopped.  Lindsay's  plan  was  to  give 
the  "would-be  gold  exporter,"  not  gold  to  export,  but  a 
draft  on  the  Government's  gold  fund  located  in  London  and 
held  as  a  deposit  in  the  Bank  of  England,  and  to  deduct 
from  the  value  of  the  draft  £  penny  on  each  i6d.  to  cover 
the  expenses  (interest  in  transit,  freight,  insurance,  etc.) 
which  the  " would-be  gold  exporter"  would  have  incurred 
had  he  been  compelled  to  ship  gold  from  India  to  London. 
The  rupees  which  he  would  pay  for  these  drafts  were  to  be 

1  Ibid.,  Qs.  3382-3390. 

2  There  were  frequent  suggestions  of  other  rates,  especially  the  rates  of 
i5<f.  and  of   iqd.    While  Lindsay  claimed  that  his  plan  would  work  as  well 
with  one  rate  as  another,  he  preferred  decidedly  the  i6d.  rate. 

8  These  gold  standard  reserve  sales  of  drafts  were  to  take  the  place  of  the 
importation  and  exportation  of  bullion,  and,  being  monetary  operations 
rather  than  fiscal,  were  to  be  independent  of  the  Government's  fiscal  opera- 
tions in  the  sale  of  council  bills.  On  the  subject  of  the  relation  between  the 
sale  of  council  bills  and  of  gold  standard  reserve  drafts,  see  Lindsay's  testi- 
mony, Fowler  Com.  Rep.,  Evidence,  Qs.  3760-3787. 


84  MODERN  CURRENCY  REFORMS 

physically  withdrawn  from  circulation  and  tied  up  in  the 
Government's  gold  standard  reserve  vaults  in  India,  thereby 
reducing  the  country's  circulation  as  effectively  as  it  would 
have  been  reduced  had  the  equivalent  in  gold  coin  been 
withdrawn  from  active  circulation  and  shipped  to  London. 
This  withdrawal  of  rupees  from  circulation  would  reduce 
the  relative  redundancy  of  the  currency  and  tend  to  force 
exchange  back  toward  the  i6d.  par.  When  exchange 
turned  in  favor  of  India,  and  rose  to  the  gold-import  point, 
which  Lindsay  considered  to  be  i6^d.,1  the  Bank  of 
England  was  to  stand  ready  to  sell  the  "  would-be  gold  im- 
porter" into  India,  not  sovereigns  nor  rupees  for  shipment 
to  India,  but  rupee  drafts  on  the  rupee  part  of  the  gold 
standard  reserve  held  in  Calcutta  or  Bombay,  giving  him 
title  thereby  to  the  rupees  already  laid  down  in  India. 
The  presentation  of  the  draft  in  India  would  release  the 
rupees  from  the  treasury  vaults  and  put  them  into  circula- 
tion, thereby  increasing  the  amount  in  circulation  as 
effectively  as  the  importation  of  an  equivalent  amount  of 
gold  coin  or  rupees  would  have  increased  it. 

Ordinarily  the  drafts  sold  in  London  on  the  rupee  part  of 
the  gold  standard  reserve  would  be  demand  drafts,  but  in 
case  the  rupee  fund  were  low,  Lindsay  suggested  that  usance 
drafts  might  be  sold,  which  would  allow  time  for  the 
Government  to  purchase  silver  in  London,  ship  it  to  India, 
and  have  rupees  minted  before  the  drafts  would  mature. 
Other  methods  for  meeting  this  difficulty  in  case  of  emer- 
gency would  be  to  make  transfers  between  the  gold  standard 
reserve  and  the  government  Paper  Currency  Reserve  so 
that  the  bullion  in  process  of  shipment  and  coinage  could  be 

1  The  reason  for  placing  the  gold-import  point  only  i/i6d.  above  par, 
while  the  gold-export  point  was  placed  i/qd.  below  par,  appears  to  have  been 
to  make  it  so  low  that  there  would  under  no  circumstances  be  any  temptation 
to  ship  gold  to  India  for  the  purpose  of  securing  rupees.  In  this  connection 
it  should  be  remembered  that  gold  on  its  way  from  Australia  to  London 
could  be  "sidetracked"  to  India  very  cheaply.  Fowler  Com.  Rep.,  Evi- 
dence, Q.  3406. 


THE   FOWLER  COMMITTEE'S  INVESTIGATION  85 

credited  to  the  Paper  Currency  Reserve  and  a  correspond- 
ing amount  of  notes  or  rupees  transferred  from  that  to  the 
rupee  part  of  the  gold  standard  reserve  in  Calcutta  or 
Bombay.1 

This  mechanism,  Lindsay  maintained,  was  just  as  auto- 
matic as  the  strict  gold  standard  and  was  more  economical, 
better  suited  to  Indian  conditions,  and  involved  less  dis- 
turbance to  existing  customs.  There  were  only  three  uses 
for  gold  coin  in  India,  he  said,  and  they  were  (i)  hoarding, 
(2)  internal  circulation,  (3)  settlement  of  foreign  balances. 

The  great  Indian  evil  of  hoarding  he  believed  would  be 
greatly  increased  as  far  as  gold  was  concerned  if  gold  coin 
were  made  readily  accessible  to  the  people  by  being  placed 
in  circulation.  Redemption  of  rupees  in  gold  in  India  there- 
fore by  feeding  the  hoards  would  require  a  much  larger 
supply  of  gold  than  would  redemption  in  gold  drafts.2 

So  far  as  domestic  circulation  was  concerned,  Lindsay 
claimed  that  the  people  were  familiar  with  rupees,  and  that 
rupees  were  better  suited  to  the  trade  of  the  country  than 
gold  would  be.  There  was  no  need  of  gold  money  in  India, 
but  there  was  a  great  need  of  a  gold  standard  in  which  the 
public  would  have  perfect  confidence.  For  the  securing 
of  the  gold  standard  the  all-important  requirement  was  con- 
vertibility. Effective  convertibility  required  no  more  than 
that  gold  should  always  be  available  in  London  at  a  fixed 
rate  against  rupees  paid  in  India,  for  the  settlement  of 
India's  debit  balances.  This  would  prevent  the  rupee 
currency  from  becoming  to  any  large  extent  relatively  re- 
dundant and  from  depreciating  in  its  gold  value.  On  the 
other  hand,  rupees  should  always  be  available  in  India  at  a 
fixed  rate  against  gold  paid  into  the  reserve  in  London,  for 
the  settlement  of  India's  credit  balances.  This  would 
prevent  the  rupee  currency  from  becoming  relatively 
scarce  to  any  considerable  extent  and  from  appreciating 

1  Ibid.,  Evidence,  Qs.  3389,  3390,  and  4038. 

2  Cf.  ibid.,  Qs.  3580-3582. 


86  MODERN  CURRENCY  REFORMS 

in  its  gold  value.  These  needs,  Lindsay  claimed,  could  be 
met  just  as  well  and  just  as  automatically  by  the  sale  of 
drafts  as  by  the  shipment  of  gold,  and  at  a  substantially  less 
expense. 

Lindsay  gave  seven  positive  reasons  why  London  was 
preferable  to  Indian  cities  as  a  place  for  the  keeping  of  the 
gold  part  of  the  proposed  gold  standard  reserve.  They  were  : 

"  First,  .  .  .  that  the  gold  is  really  required  only  for 
settlement  of  the  balances  of  India's  foreign  indebtedness, 
and  as  London  is  the  one  great  centre  for  settlement 
of  international  indebtedness,  it  would  be  the  most  con- 
venient spot  both  for  receipt  and  payment  of  the  gold. 
Secondly,  there  must  be  more  or  less  uncertainty  as  to 
the  quantity  of  gold  or  sterling  money  required  as  a  con- 
version fund,  and  gold  or  sterling  money  can  always  be 
borrowed  in  London  at  short  notice,  whereas  there  would 
be  no  facilities  for  prompt  replenishment  in  India.  Thirdly, 
the  establishment  of  the  fund  in  India  would  withdraw 
gold  from  London,  whereas  its  location  in  the  Bank  of 
England  would  strengthen  the  great  central  reserve  of  the 
Empire.  Fourthly,  India  is  a  hoarding  country,  and 
if  her  currency  is  made  convertible  on  the  spot  into  gold 
coins,  or  even  into  gold  bars,  and  these  bars  are  always  ex- 
changeable on  the  spot  into  currency,  there  is  a  danger  that 
the  gold  bars  and  coins  will  be  absorbed  into  hoards  and  kept 
there,  instead  of  rupees  bearing  extrinsic  value.  Fifthly, 
the  location  of  the  reserve  in  India  might  create  a  monetary 
crisis  under  exceptional  circumstances.  Although  London 
can  obtain  gold  in  a  few  days'  time,  both  from  Paris  and 
Berlin,  yet  a  monetary  crisis  occurs  here  now  and  then, 
because  the  gold  is  not  obtainable  promptly.  India  is 
protected  as  a  rule  from  these  crises  by  the  system  of  council 
wire  transfers ;  but  these  are  not  always  available,  and, 
looking  to  the  great  distance  between  London  and  India, 
the  issue  of  fresh  currency  should  not  be  delayed  until  gold 
can  be  imported.  Sixthly,  under  ordinary  circumstances 
(i.e.  except  during  or  shortly  after  periods  of  redundancy), 
the  gold  paid  by  the  public  into  the  conversion  fund  will 


THE  FOWLER   COMMITTEE'S   INVESTIGATION  87 

be  for  the  purchase  of  new  rupees,  and  part  of  the  gold  will, 
therefore,  be  used  by  Government  in  the  purchase  of  silver 
for  the  Mint.  As  silver  can  best  be  bought  in  London,  it  is 
desirable  that  Government  should  receive  the  gold  there. 
If  the  gold  is  received  in  India,  and  the  silver  bought  there, 
not  only  will  Government  have  to  buy  in  a  small  and  un- 
reliable market,  but  two  metals  will  be  sent  to  India  when 
one  only,  viz.  silver,  is  wanted.  Seventhly,  the  object  of 
the  scheme  is  to  prevent  the  use  of  gold  as  currency  in 
India,  and  to  confine  its  use  in  connexion  with  the  Indian 
currency  to  the  settlement  of  the  balances  of  India's 
foreign  indebtedness;  and  it  is  pure  waste  of  time  and 
money  to  bring  gold  out  to  India  merely  for  the  purpose  of 
having  it  sent  back."  l 

It  was  stated  above  that  Lindsay  proposed  to  inaugurate 
the  gold  standard  reserve  with  an  initial  sum  of  £10  millions 
secured  by  a  loan.2  Why  was  this  amount  chosen  ?  Lind- 
say's reasoning  was  that  the  demands  for  drafts  on  the 
gold  standard  reserve  would  come  almost  entirely  from  the 
presidency  banks  of  India,  —  the  banks  in  which  the  bal- 
ances of  the  exchange  banks  are  largely  held,3 — and  that 
they  would  normally  come  during  India's  slack  season, 
which  reaches  its  height  about  November.  Comparing 
the  cash  balances  of  these  presidency  banks  for  a  recent 
period  of  years,  he  found  that  the  extreme  variations 
were  from  loj  crores  to  3^  crores,  or  7  crores  (the  equiva- 
lent of  about  £4.7  millions).4  He  reasoned  that  the  banks 
could  not  well  afford  to  let  their  cash  reserves  run  below 
this  minimum  of  about  3^  crores,  and  that  therefore  a 
gold  standard  reserve  fund  sufficient  to  relieve  the  Indian 
money  market  of  7  crores  of  rupees  and  leave  a  fair  margin 
of  safety  would  be  sufficient.  To  be  on  the  safe  side,  he 

1  Fowler  Com.  Rep.,  Evidence,  Q.  4056. 

2  The  amount  could  be  reduced  if  his  proposed  prohibitive  tax  on  the  im- 
portation of  silver  were  levied.     Cf.  supra,  p.  82,  note  4. 

3  Fowler  Com.  Rep.,  Evidence,  Qs.  3567  and  4167. 

4  Ibid.,  Q.  3933. 


88  MODERN  CURRENCY  REFORMS 

doubled  this  maximum  annual  range  of  the  reserves  of  the 
presidency  banks  and  arrived  at  the  round  sum  of  £10  mil- 
lions. This  amount,  he  said,  would  be  sufficient  to  meet 
any  demands  on  the  reserve  that  would  be  at  all  probable. 
The  £10  millions  would  be  slightly  more  than  enough  (at 
i5fj.  to  the  rupee)  to  redeem  15  crores  of  rupees.  Lind- 
say suggested,  however,  that  before  any  great  emergency 
should  reduce  the  gold  reserve  to  the  "  apprehension 
point"  a  part  of  the  rupees  accumulated  in  the  reserve  in 
India  should  be  sold  in  London  as  silver  bullion,  and  the 
gold  balance  in  London  be  reenforced  from  the  proceeds. 
Such  a  sale,  he  calculated,  would  readily  provide  an  in- 
crease in  the  gold  reserve  sufficient  to  redeem  a  further  5 
crores  of  rupees  (about  £2.9  millions),  so  that  the  suggested 
reserve  would  be  adequate  for  the  withdrawal  from  circu- 
lation and  redemption  of  20  crores  of  rupees.1  The  prob- 
abilities were  extremely  remote,  Lindsay  believed,  of  any 
redundancy  taking  place  that  could  not  be  cared  for  by 
the  withdrawal  from  circulation  of  20  crores  of  rupees.2 
Should  such  a  contingency  arise  —  and  it  would  be  more 
likely  to  arise  under  a  strict  gold  standard  than  under  his 
scheme  —  he  proposed  as  a  last  resort  that  the  Indian 
Government  should  float  a  short-time  loan  in  London  for 
replenishing  the  reserve.3 

1  In  case  exchange  became  strongly  unfavorable  to  India,  and  the  locking 
up  in  the  reserve  vaults  of  9  crores  of  rupees  against  sales  of  drafts  on  London 
proved  insufficient  to  relieve  the  redundancy,  Lindsay  said  the  situation 
and  procedure  would  be  as  follows :  "With  a  £10,000,000  reserve  fund  there 
would  be  9  crores  of  rupees  in  the  Indian  Gold  Standard  offices,  and  only 
£4,000,000  sterling  in  the  London  Gold  Standard  offices.     This  might  be 
taken  as  apprehension  point,  so  half  of  the  9  crores  of  rupees  would  be  melted, 
and  the  bullion  sold  in  London  for  sterling  money,  which  would  be  deposited 
in  the  London  Gold  Standard  office.     If  sold  at  26d.  per  ounce,  the  bullion 
would  fetch  about  £1,500,000,  and  the  London  reserve  would    become 
£5 ,500,000.  By  repeating  this  melting  operation,  the  rupee  currency  might  be 
contracted  to  the  extent  of  about  20  crores  with  a  £10,000,000  reserve  fund." 
Ibid.,  Q.  3769. 

2  Ibid.,  Qs.  3528-30. 
» Ibid,  Q.  3458. 


THE  FOWLER  COMMITTEE'S  INVESTIGATION          89 

Objections  Raised  to  the  Lindsay  Plan-  Such  were  the 
essentials  of  the  Lindsay  Plan.  Against  it  many  objections 
were  brought,  each  of  which  Lindsay  answered  with  force- 
ful logic.  It  will  be  useful  to  consider  briefly  the  more 
important  of  these  objections  and  Lindsay's  replies : 

(i)  The  Indian  Government,  after  saying  that  the  Lind- 
say plan  had  much  to  recommend  it,  said : 

"Our  main  reason  for  deciding  not  to  adopt  it  is  that  it 
would  involve  us  in  a  liability  to  pay  out  gold  in  London 
in  exchange  for  rupees  received  in  India  to  an  indefinite 
extent.  Even  if  the  ultimate  liability  were  not  greater 
than  under  our  own  scheme,  still  its  extent,  from  time  to 
time,  would  be  quite  beyond  our  control,  and  -we  can 
easily  conceive  that  we  might  find  ourselves  unable  to  dis- 
charge it  on  certain  quite  possible  suppositions  as  to  the 
market  rate  of  exchange  and  as  to  the  comparative  redun- 
dancy of  the  existing  volume  of  the  rupee  currency.  Mr. 
Lindsay,  it  appears  to  us,  does  not  give  sufficient  weight 
to  one  fundamental  necessity  of  our  position,  namely,  that 
we  must  remit,  in  the  contrary  direction  to  that  in  which 
the  offer  suggested  by  Mr.  Lindsay  would  be  operative,  an 
annual  sum  of  about  £17,000,000  [by  means  of  council  bills] 
to  discharge  our  sterling  liabilities."  * 

In  reply  to  this  argument,  Lindsay  maintained  that  the 
liability  was  not  unlimited,  since  the  amount  of  rupees  that 
could  be  taken  out  of  the  exchange  market  for  the  purchase 
of  government  drafts,  without  causing  such  a  scarcity  of 
money  as  automatically  to  stop  the  withdrawal  of  money 
from  circulation,  was  limited.  Furthermore  he  said  that 
the  maintenance  of  the  value  of  the  rupee  and  of  confidence 
in  its  future  stability  would  require  redemption  in  either 
gold  or  gold  drafts,  and  that  under  the  Indian  Govern- 
ment's scheme  for  redemption  in  gold  in  India,  the  liability 

1  Letter  of  Secretary  of  State  for  India,  March  3, 1898,  in  Correspondence 
respecting  the  Proposals  on  Currency  Made  by  the  Government  of  India. 
Cd.  8840  of  1898,  sec.  28. 


90  MODERN  CURRENCY  REFORMS 

of  the  Government  would  be  much  greater  than  under  his 
scheme,  since  the  public  would  make  demands  on  the 
Government's  reserve  not  only  to  secure  gold  for  settling 
trade  balances,  but  also  to  secure  gold  for  hoards  and  in- 
ternal circulation.1 

(2)  A  second  objection  to  the  scheme  related  to  the  effect 
upon  confidence  in  India  of  the  provision  to  locate  the  gold 
reserve  in  London.  On  this  point  Sir  James  Westland 
said  in  his  memorandum  on  the  Lindsay  scheme : 

"The  public  will  regard  with  distrust  arrangements  for  the 
establishment  of  a  gold  standard  in  India  which  carefully 
involve  the  location  of  the  gold  reserve  in  London  and  its 
use  there  by  trade.  A  gold  reserve  intended  to  support  the 
introduction  and  maintenance  of  a  gold  standard  in  any 
country  ought  to  be  kept  in  the  country  if  it  is  to  produce 
its  full  effect  in  the  way  of  establishing  the  confidence 
which  is  almost  indispensable  to  the  success  of  the  measure. 
If  the  Indian  gold  reserve  is  located  in  London  and  the  pub- 
lic believe  that  it  may  at  any  time  vanish  in  supplying  the 
requirements  of  trade  or  of  the  Secretary  of  State,  confi- 
dence will  hardly  be  established ;  and  in  any  case  it  seems 
certain  that  a  reserve  of  any  named  amount  will  produce 
a  greater  effect  if  it  is  located  in  India  than  if  it  is  six 
thousand  miles  away."  2 

In  reply  to  this  criticism  Lindsay  said : 

"My  answer,  in  the  first  place,  with  regard  to  the  dis- 
trust is  this.  It  is  only  people  who  send  out  capital  to 
India  that  are  concerned  in  this  matter;  the  people  who 
work  with  local  capital  in  India  will  be  very  much  in  the 
same  position  as  they  are  at  present.  The  token  rupees 
are  all  they  want.  It  is  those  who  send  out  capital  to  India 
that  should  be  inspired  with  confidence,  and  these  people 
will,  in  my  opinion,  have  greater  confidence  if  the  gold 

1  Fowler  Com.  Rep.,  Evidence,  Qs.  4059  and  4060. 

2  Correspondence  respecting  the  Proposals  on  Currency  Made  by  the 
Government  of  India.     Cd.  8840  of  1898,  p.  18. 


THE   FOWLER  COMMITTEE'S  INVESTIGATION  91 

is  here  in  London.  Then,  with  regard  to  the  gold  vanishing 
in  supplying  the  requirements  of  trade  or  of  the  Secre- 
tary of  State,  I  would  say  that  there  is  much  greater  danger 
that  the  gold  that  Sir  James  Westland  proposes  to  introduce 
into  circulation  in  India  may  vanish,  because  in  addition 
to  supplying  the  requirements  of  foreign  remittance  and 
the  Secretary  of  State's  drafts,  the  gold  would  be  liable  to 
be  used  in  internal  circulation,  and  to  be  taken  into  hoards. 
Here  the  gold  is  reserved  for  one  of  the  three  purposes  for 
which  gold  is  required  in  connexion  with  currency.  It  will 
be  used  solely  for  the  purpose  of  fixing  exchange,  and  will, 
therefore,  be  employed  in  the  manner  best  calculated  to 
inspire  confidence  in  the  stability  of  exchange."  l 

(3)  Sir  James  Westland  criticized  the  Plan  on  the  ground 
that  it  did  not  give  the  Government  sufficient    control 
over  the  exchange  situation.     Lindsay  replied  that   this 
freedom  from  governmental  intervention  and  manipulation 
was  one  of  the  great  merits  of  his  scheme.     It  would  work  as 
automatically,  he  claimed,  as  a  gold  standard  with  gold 
currency.2 

(4)  A  fourth  objection  of  some  weight  was  raised  by  Sir 
David  B  arbour.     It  was  the  evil  effect  on  the  Indian  cur- 
rency that  would  result  from  a  panic  in  the  city  of  London 
at  a  time  when  India's  gold  standard  reserve  was  largely 
tied  up  in  a  deposit  account  at  the  Bank  of  England.     In 
reply  Lindsay  pointed  out  that  the  Peel  Act  had  been 
suspended  more  than  once  during  a  crisis ;    and  that  the 
Indian  demands  on  the  gold  standard  reserve  in  the  Bank 
of  England  would  not  be  so  much  demands  for  gold  to  be 
withdrawn  from  the  Bank  as  demands  for  credit  to  be  trans- 
ferred from  one  account  in  the  Bank  to  another.     A  gold 
currency  system  or  any  other  system,  he  said,  is  likely  to 
break   down   in   exceptional   circumstances,  e.g.  the  sus- 
pension of  bank-note  convertibility  in  France  during  the 

1  Fowler  Com.  Rep.,  Evidence,  Q.  4057. 
*  Ibid.,  Qs.  4063-4066. 


Q2  MODERN  CURRENCY  REFORMS 

Franco-Prussian  War ;  and  that  the  temporary  suspension 
of  the  convertibility  of  rupees  into  sterling  drafts  would  be 
excusable  as  a  last  resort  during  a  crisis.1 

Into  the  further  arguments  we  need  not  go.  The  reader 
will  find  a  number  of  them  discussed  in  the  citations  al- 
ready given.  Suffice  it  to  say  that,  despite  the  strength  of 
Lindsay's  reasoning,  the  Fowler  Committee  rejected  his 
Plan.2 

The  Indian  Government's  Proposals 

We  may  now  return  to  a  consideration  of  the  Fowler  Com- 
mittee's attitude  toward  the  Indian  Government's  proposal 
for  the  melting  down  of  a  large  number  of  rupees  (perhaps  24 
crores)  so  as  to  force  exchange  to  the  i6d.  par,  and  for  the 
accumulation  of  a  gold  reserve  and  the  immediate  estab- 
lishment of  a  gold  standard  with  gold  in  circulation. 

The  opposition  to  the  Government's  proposal  to  secure 
a  further  relative  contraction  of  the  currency  by  melting 
down  a  large  number  of  rupees  had  been  strong  both  in 
India  and  in  England.3  Fortunately,  before  the  Fowler 
Committee  was  ready  to  make  its  report,  Indian  exchange 
had  reached  1 6 d.,  with  considerable  promise  of  permanence, 
and  over  £2^-  millions  in  gold  had  been  paid  to  the  Gov- 
ernment of  India  for  the  purpose  of  obtaining  rupees.4 
This  situation  removed  the  need  of  melting  rupees  to  attain 

1  Fowler  Com.  Rep.,  Evidence,  Qs.  3572-3574. 

2  Ibid.,  sec.  54. 

8  Said  the  [London]  Economist  when  the  proposal  was  made:  "To  put 
it  bluntly,  the  Indian  market  is  to  be  tortured  into  procuring  the  gold 
necessary  for  the  carrying  out  of  the  Government's  plan.  .  .  .  Commerce 
is  to  be  starved  that  rates  of  exchange  may  be  forced  up.  And  the  starva- 
tion must  be  keen  if  it  is  to  serve  its  purpose.  If  10  and  12  per  cent  rates 
for  money  have  failed  to  attract  gold,  what  rates  must  suffice  in  order  to 
cause  it  to  flow  in  in  such  volume  as  to  fill  the  void  caused  by  the  withdrawal 
of,  say,  10  or  20  millions  of  silver  coin  ?  Not  only  so ;  the  Indian  money 
market  is  to  be  constantly  under  the  thumb  of  the  Government,  which  can 
turn  the  screw  on  as  and  when  it  chooses,  and  is  to  be  so  kept  in  a  state  of 
constant  uncertainty."  LVI,  1898,  p.  684. 

4  Fowler  Com.  Rep.,  sec.  39. 


THE  FOWLER  COMMITTEE'S  INVESTIGATION          93 

the  i6d.  par.  "Automatically,  therefore,"  said  the  Report, 
"existing  currency  arrangements  sufficed  not  only  to  main- 
tain without  monetary  stringency  a  steady  gold  standard  in 
1898-99,  but  also  to  initiate  a  gold  reserve  in  India,  to  serve 
as  a  bulwark  for  the  maintenance  of  the  gold  standard  in 
future  years."  l  The  Fowler  Committee,  however,  formally 
considered  the  Government's  recommendation  to  melt  down 
rupees  and  refused  to  adopt  it.2 

Fowler  Committee's  Attitude  concerning  Gold  Coin  and  a 
Gold  Reserve 

As  to  the  introduction  of  gold  coins  into  circulation  in 
India,  the  Fowler  Committee  said:  "We  are  in  favor  of 
making  the  British  sovereign  a  legal  tender  and  a  current 
coin  in  India.  We  also  consider  that,  at  the  same  time, 
the  Indian  mints  should  be  thrown  open  to  the  unrestricted 
coinage  of  gold  on  terms  and  conditions  such  as  govern  the 
three  Australian  Branches  of  the  Royal  Mint."3 

Although  favoring  the  accumulation  of  a  special  gold  re- 
serve out  of  the  seigniorage  profits  on  rupee  coinage,  for 
maintaining  the  parity  of  the  rupee,  the  Committee  was 
opposed  to  the  Indian  Government's  assuming  any  obliga- 
tion to  redeem  rupees  in  gold  on  demand.  The  assumption 
of  such  an  indefinite  liability  it  considered  dangerous. 
None  the  less,  the  Committee  said : 

"We  regard  it  as  the  principal  use  of  a  gold  reserve  that  it 
should  be  freely  available  for  foreign  remittances  whenever 
the  exchange  falls  below  specie  point ;  and  the  Government 
of  India  should  make  its  gold  available  for  this  purpose, 
when  necessary,  under  such  conditions  as  the  circumstances 
of  the  time  may  render  desirable." 

1  Ibid  ,  sec.  40. 

2  For  discussion  of  the  proposal  and  reasons  for  its  rejection  see  ibid.,  sees. 
43-47- 

8  Ibid.,  sec.  54. 
4  Ibid.,  sec.  59. 


94  MODERN  CURRENCY  REFORMS 

The  unwillingness  of  the  Government  to  assume  a  positive 
obligation  for  the  maintenance  of  the  gold  parity  of  the 
rupee,  at  a  definite  rate  through  a  definite  promise  to  convert 
rupees  into  gold  on  demand,  brought  an  element  of  uncer- 
tainty and  distrust  into  the  Indian  currency  situation  which 
has  continued  to  this  day,  although  it  reached  its  peak  in  the 
crisis  of  190  7-08  .*  It  is  evident  that  either  the  Government 
must  establish  a  gold  reserve  and  assume  clearly  and  fully 
the  responsibility  for  maintaining  the  parity  of  the  currency 
by  redeeming  rupees  on  demand  in  gold  or  gold  exchange 
or  it  must  pass  on  to  the  public  the  unassumed  part  of  the 
burden  of  carrying  the  risk  of  depreciation.  In  the  latter 
contingency  the  public  will  nearly  always  exaggerate  the 
risk  it  is  carrying,  for  it  is  likely  to  underestimate  the 
Government's  feeling  of  moral  responsibility.  The  Govern- 
ment, as  the  representative  of  the  entire  public,  and  as 
the  body  best  situated  to  secure  thorough  knowledge  of 
currency  and  credit  conditions  throughout  the  country,  is 
the  body  that  should  assume  this  full  responsibility.  A 
positive  assumption  of  such  a  burden  is  likely  to  be  much 
more  effective,  and  in  the  long  run  less  expensive,  than  a 
half-hearted  assumption  of  the  risk  unaccompanied  by  a 
positive  commitment. 

A  i6d.  Gold  Par  Recommended 

The  Fowler  Committee  favored  (though  not  unani- 
mously) the  i6d.  rate,  to  which  it  believed  Indian  prices 
had  adjusted  themselves.  It  rightly  said  that  the  weight 
of  the  argument  rested  upon  those  who  were  proposing  a 
different  rate,  since  any  change  would  involve  disturbances ; 
and  it  did  not  find  the  arguments  in  favor  of  any  other  rate 
at  all  conclusive.2 

1  Cf.  infra,  pp.  118-121. 

2  Fowler  Com.  Rep.,  sees.  65-69. 


CHAPTER  V 

INDIAN  CURRENCY  FROM  1899  TO  1907 

THE  period  from  the  Fowler  Committee  Report  in  the 
summer  of  1899  to  the  outbreak  of  the  American  panic  in 
the  fall  of  1907,  with  its  accompanying  heavy  drains  on 
India,  is  one  of  importance  in  the  history  of  India's 
currency  system.  It  is  not,  however,  very  important  to 
the  person  who  is  studying  that  history  chiefly  for  the  light 
it  throws  upon  monetary  principles.  That  being  our 
object  in  this  study,  it  will  be  sufficient  to  summarize  briefly 
the  chief  features  of  the  period.  They  may  be  grouped 
under  three  -heads :  (i)  The  prosperity  of  India  and  the 
increasing  demand  for  rupees.  (2)  The  mechanism  by 
which  the  new  supplies  of  rupees  and  rupee-notes  were 
brought  into  circulation  and  their  parity  with  gold  main- 
tained. This  will  involve  a  discussion  of  the  functioning, 
during  the  period,  of  the  Paper  Currency  Reserve  and  the 
gold  reserve,  and  a  consideration  of  the  changing  character 
and  location  of  these  reserves.  (3)  The  progress  made  in 
the  direction  of  introducing  gold  into  the  Indian  circulation. 

Prosperity  of  India  and  Increasing  Demand  for  Rupees 

The  period  as  a  whole  from  1899  to  the  fall  of  1907  was 
one  of  great  prosperity  for  India,  although  the  fiscal  years 
1900-01  and  1901-02  were  characterized  by  the  Plague 
and  by  a  disastrous  famine.  Some  evidence  of  the  pros- 
perity will  be  afforded  by  the  figures  summarized  in  the 
following  table. 

95 


g6  MODERN  CURRENCY  REFORMS 

ECONOMIC  PROGRESS  OF  INDIA,  1899-1 908 l 


ITEM 

FISCAL  YEAR  ENDING  MARCH  31 

1899 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

Production 

(a)    Cleaned  Rice, 

estimated  yield  (ooo,- 

ooo  cwt.) 

Amount 

506 

452 

414 

384 

461 

439 

448 

433 

428 

379 

Index  number 

IOO 

79 

82 

76 

9i 

87 

89 

86 

85 

75 

(6)    Wheat      Pro- 

duction,      estimated 

(000,000  tons) 

Amount 

6.8 

5-3 

7.2 

6.1 

7-9 

9.6 

7.6 

8.6 

8-5 

6.1 

Index  number 

IOO 

78 

106 

90 

116 

141 

112 

126 

125 

90 

(c)    Tea     Produc- 

tion,2 estimated  (ooo,- 

ooo  Ibs.) 

Amount 

157 

182 

197 

191 

189 

209 

221 

221 

241 

244 

Index  number 

IOO 

116 

125 

122 

120 

133 

141 

141 

153 

155 

(d)    Cotton     Pro- 

duction,      estimated 

(400  Ib.    bales,  ooo,- 

ooo) 

Amount 

2.8 

I.O 

2.7 

2.6 

2.7 

3-8 

3-9 

4.2 

4.9 

3-9 

Index  number 

IOO 

36 

96 

93 

96 

136 

139 

150 

175 

139 

(e)    Cotton       and 

Jute  Goods,  estimated 

yarn    spun    (000,000 

Ibs.) 

Amount 

503 

502 

343 

56o 

559 

556 

556 

656 

63I 

614 

Index  number 

IOO 

IOO 

68 

in 

in 

in 

in 

I30 

125 

122 

1  Figures  are  compiled  from  the  Statistical  Abstract  relating  to  British 
India,  passim;  and  from  the  appendices  of  the  Rep.  Roy.  Com.  Ind.  Fin.  & 
Cur.    Index  numbers  are  computed  on  the  basis  of  the  figure  for  1899  as 

IOO. 

2  Figures  for  calendar  years. 


INDIAN  CURRENCY  FROM   1899  TO   1907  97 

ECONOMIC  PROGRESS  OF  INDIA  —  Continued 


ITEM 

FISCAL  YEAR  ENDING  MARCH  31 

1899 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

(/)    Cotton  Cloth, 

estimated        amount 

woven  (000,000  yds.) 

Amount 

99 

95 

96 

116 

123 

138 

159 

164 

159 

181 

Index  number 

100 

96 

97 

117 

124 

i39 

161 

166 

161 

183 

(g)    Goods       and 

Minerals      conveyed 

by    railway    systems 

of    India,    estimated 

(000,000  tons) 

Amount 

40 

43 

43 

46 

48 

52 

55 

58 

62 

62 

Index  number 

IOO 

107 

107 

H5 

1  20 

130 

137 

145 

155 

155 

Prices  1  2 

(h)    Atkinson    In- 

dex Numbers  of  In- 

dian Prices 

IOO 

96 

114 

in 

IO2 

98 

96 

107 

125 

133 

(i)    Sauerbeck  In- 

dex      Numbers      of 

British   Prices 

IOO 

106 

117 

109 

97 

108 

116 

"3 

1  20 

125 

Foreign  Trade 

(j)    Merchandise 

Exports     (£000,000) 

Value 

74 

70 

79 

84 

95 

IOI 

106 

in 

129 

IOO 

Index  number 

IOO 

95 

107 

114 

128 

136 

143 

150 

174 

i35 

1  Inasmuch  as  the  other  figures  are  for  fiscal  years  ending  March  31,  and 
as  the  price  figures  are  for  the  calendar  years,  the  price  index  numbers  given 
are  those  for  the  year  preceding  the  one  designated  at  the  head  of  the  column. 
The  calendar  year  1898  for  example  corresponds  more  nearly  to  the  fiscal 
year  ending  March  31,  1899  than  to  that  ending  March  31,  1898. 

2  To  facilitate  comparison,  index  figures  for  prices  have  been  adjusted  to 
the  basis  of  the  calendar  year  1898  as  100. 


98 


MODERN   CURRENCY   REFORMS 

ECONOMIC  PROGRESS  or  INDIA  —  Continued 


ITEM 

FISCAL  YEAR  ENDING  MARCH  31 

1899 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

(k)    Merchandise 

Imports  (£000,000) 

Value 

49 

47 

55 

53 

54 

61 

66 

72 

79 

87 

Index  number 

100 

96 

112 

108 

no 

124 

i35 

147 

161 

178 

(I)    Gross      Earn- 

ings of  Railway  Sys- 

tems of  India  (£000,- 

ooo) 

Value 

20 

21 

22 

23 

24 

26 

28 

29 

32 

30 

Index  number 

100 

105 

110 

H5 

1  20 

130 

140 

145 

1  60 

150 

General  Index 

Numbers 

(m)    Average      In- 

dex Number  of  Prod- 

ucts (a  to  g) 

IOO 

89 

97 

103 

in 

125 

127 

135 

140 

131 

(«)    Average     In- 

dex Number  of  For- 

eign Trade  and  Rail- 

way   Transportation 

(/  to  0 

TOO 

99 

no 

112 

119 

130 

139 

147 

165 

154 

Eliminating  variations  due  to  changes  in  the  value  of  the 
monetary  unit,  by  employing  only  units  of  physical  quan- 
tity, and  using  as  the  criterion  of  economic  development  a 
simple  average  index  number  of  the  seven  items :  (i)  pro- 
duction of  rice,  (2)  production  of  wheat,  (3)  production 
of  tea,  (4)  production  of  cotton,  (5)  amount  of  cotton  and 
jute  yarn  spun,  (6)  amount  of  cotton  cloth  wove,  and 
(7)  quantity  of  goods  conveyed  by  railroad  systems  of 
India,  we  arrive  at  the  figures  given  in  horizontal  column 
m  of  the  table,  which  it  will  be  noted  show  an  increase  of 
40  per  cent  from  1899  to  1907,  despite  the  decline  during 
the  famine  period  of  1900  and  1901. 


INDIAN  CURRENCY  FROM   1899  TO   1907  99 

At  this  time  India  was  on  a  gold  standard,  the  actual 
unit  of  value  being  1/15  of  a  sovereign  or  about  7.53  grains 
of  pure  gold.  These  were  years  during  which  the  value  of 
gold  was  depreciating  the  world  over,  chiefly  as  a  result  of 
the  large  gold  production  in  South  Africa,  and  gold  prices 
were  rising  in  all  gold  standard  countries.  The  Sauerbeck 
index  numbers  for  British  prices  (horizontal  column  i  of 
table)  rose  20  per  cent  from  1899  to  1907.  If  the  Indian 
price  level  was  to  keep  in  equilibrium  with  the  price  levels 
of  other  countries  it  must  also  rise.  Referring  to  the  At- 
kinson index  numbers  of  Indian  prices,  we  find  that  for  the 
same  period,  1899-1907,  they  increased  25  per  cent.  The 
result  was  that  not  only  were  there  more  goods  to  be  ex- 
changed in  India  in  1907  than  in  1899  (horizontal  columns 
a  to  g  of  table),  but  that  those  exchanges  were  necessarily 
made  at  a  higher  price  level.  This  twofold  increase  in  the 
demand  for  money  is  evidenced  by  certain  general  criteria 
of  trade  which  cover  both  products  and  prices,  like  mer- 
chandise exports,  merchandise  imports,  and  gross  earnings  of 
the  Indian  railway  system.  The  combined  index  numbers 
for  these  three  items  (horizontal  column  n  of  table)  show  an 
increase  from  100  in  1899  to  165  in  1907.  Inasmuch  as  in 
India  the  great  bulk  of  the  business  is  effected  by  means  of 
cash  rather  than  by  bank  checks,  and  as  under  the  inertia 
of  oriental  custom  there  is  probably  little  change  in  the 
rate  of  monetary  turnover  from  year  to  year  (except  in 
times  of  famine),  this  large  increase  in  business  to  be  trans- 
acted at  a  higher  price  level  required  a  great  influx  of  rupees 
into  the  Indian  circulation. 

The  New  Supply  of  Rupees  and  the  Mechanism  by  Which 
its  Gold  Parity  was  Maintained 

The  official  figures  show  this  period  to  have  been  charac- 
terized by  a  phenomenal  increase  in  the  amount  of  money 
poured  into  India's  circulation.  They  are  as  follows : 


100 


MODERN  CURRENCY  REFORMS 


NET  CURRENCY  NOTES  IN  CIRCULA- 

YEAR 

RUPEES  AND  SMALL  SILVER 
COINS  MINTED  IN  INDIA  1 

TION      (i.e.      CURRENCY      NOTES 
ISSUED,  LESS  AMOUNTS  IN  GOVERN- 
MENT TREASURIES  AND  LESS  SILVER 

IN  PAPER  CURRENCY  RESERVE)  a 

R.  000,000 

R.  000,000 

1898-99 

2-5 

77 

1899-00 

22.3 

195 

1900-01 

172.6 

126 

1901-02 

Sl-3 

231 

1902-03 

II3-9 

180 

1903-04 

165-3 

195 

1904-05 

"3-7 

206 

1905-06 

2OO.O 

216 

1906-07 

260.8 

223 

1907-08 

iSl.I 

133 

Aside  from  the  small  amount  of  recoined  rupees,  these 
large  amounts  of  rupees  coined  each  year  could  only  be 
issued  against  their  equivalents  in  gold  paid  to  the  Indian 
Government  at  the  rate  of  a  sovereign  for  15  rupees  (or 
approximately  that),  and,  inasmuch  as  the  security  part  of 
the  Paper  Currency  Reserve  was  constant  at  approximately 
R.  100  millions  down  to  1906  and  at  R.  120  millions  in 
1906  and  1907,  the  net  increase  in  the  currency  notes 
(uncovered  by  silver),  as  given  above,  also  represented  de- 
posits of  gold.  The  fact  is  that  during  this  period  the 
Indian  Government  was  literally  flooded  with  gold  presented 
for  the  purchase  of  rupees  and  currency  notes,  and  its  prob- 
lem soon  became  the  problem  of  a  plethora  and  not  a  scar- 
city of  gold.  Let  us  consider  a  few  of  the  chief  facts  in  this 
movement. 

Issue  of  Currency  Notes  in  India  against  Sovereigns  and 
Silver  Bullion  Deposited  in  London.  Early  in  1898  a  small 
sum  of  gold  was  paid  into  the  Paper  Currency  Reserve  in 

1  Exclusive  of  that  coined  for  native  states.     Figures  were   computed 
from  Statistical  Abstract  relating  to  British  India,  38th  number,  p.  89  and 
48th  number,  p.  89. 

2  Figures  were  computed  from  App.  VIII,  Tables  i  and  2,  of  Rep.  Roy. 
Com.  Ind.  Fin.  &  Cur. 


INDIAN  CURRENCY  FROM.  1899,  TO   1007  ^ci 

India  for  the  purchase  of  rupees  at  the  rate  of  1 5  rupees  to 
the  sovereign  under  authority  of  Act  VIII  of  1893.  This 
Act  of  1893  had  been  supplemented  by  Act  II  of  1898, 
intended  to  be  but  temporary,  which  authorized  the  issue 
of  paper  currency  notes  in  India  against  gold  deposited 
with  the  Secretary  of  State  at  the  Bank  of  England  in 
London  and  earmarked  in  the  Bank  as  part  of  the  Paper 
Currency  Reserve.  The  origin  of  this  plan  of  issuing 
paper  currency  notes  in  India  against  gold  deposited  in 
London,  and  later  even  against  silver  bullion  purchased  in 
London  for  the  coinage  of  rupees  in  India,  is  explained  in  a 
memorandum  submitted  by  the  Indian  Financial  Secretary 
to  the  Royal  Commission  on  Indian  Finance  and  Currency.1 
As  a  result  of  the  practical  discontinuance  of  rupee 
coinage  during  the  period  1893-98,  of  the  Indian  famine  of 
1896-97,  and  other  causes,  the  balances  of  the  Indian 
Government  in  India  were  very  low  in  1898.  Trade, 
however,  was  improving,  and  demands  for  remittances  to 
India  were  heavy ;  discount  rates  at  the  Presidency  Banks 
of  Calcutta  and  Bombay  were  n  and  12  per  cent  respec- 
tively, and  cable  transfers  on  India  were  selling  in  London 
at  i6-£zd.  —  approximately  the  gold-export  point  for 
London.  It  was  to  meet  this  crisis  that  the  above- 
mentioned  Act  (Act  II  of  1898)  was  passed  as  a  purely 
temporary  measure.  Under  it  "the  proceeds  of  the  Secre- 
tary of  State's  sales  of  council  bills  could  be  set  aside  at  the 
Bank  of  England  in  gold  as  part  of  the  Indian  Paper  Cur- 
rency Reserve.  The  Government  of  India  could  issue 
notes  against  the  gold  so  set  aside,  and  with  them  could 
meet  pro  tanto  the  Secretary  of  State's  drafts,  without  re- 
ducing their  treasury  balances."  2  It  was  only  as  a  tem- 
porary matter  that  any  of  the  Paper  Currency  Reserve 
was  to  be  held  in  London,  for  the  Act  provided  that 
the  gold  so  set  apart  by  the  Secretary  of  State  in 
London  should  be  held  by  him  "  until  he  shall  trans- 
1  Ibid.,  App.  VIII,  pp.  241-242.  2  Ibid.,  p.  241. 


102  MODERN  CURRENCY  REFORMS 

mit  the  same,  or  what  he  shall  determine  to  be  equivalent 
to  the  same,  in  gold  coin  or  gold  bullion  to  India, 
or  until  the  Government  of  India  shall  appropriate  and 
set  apart  in  India  as  a  part  of  the  Currency  Reserve 
...  an  amount  of  coin  of  the  Government  of  India 
equal  in  value  to  such  notes."  This  measure  adopted 
by  the  Government  a  year  before  the  Fowler  Committee 
made  its  report  recommending  the  rejection  of  the  Lindsay 
Plan  —  a  recommendation  accepted  by  the  Indian  Govern- 
ment —  was  in  reality  a  substantial  step  in  the  direction  of 
Lindsay's  proposal.  It  was  the  sale  of  exchange  in  London 
by  the  Secretary  of  State  on  the  Paper  Currency  Reserve  in 
India,  at  rates  representing  practically  the  gold-export 
point  for  London,  with  the  primary  object  of  releasing 
currency  to  meet  monetary  demands  in  India.  A  few 
months  later  the  Act  was  extended  by  Act  VIII  of  1898 
for  two  and  a  half  years.  In  1900  (by  Act  VIII)  it  was  ex- 
tended two  years  more  and  provisions  were  added  authoriz- 
ing the  Secretary  of  State  to  use  the  gold  so  received  by  him 
for  the  purchase  of  silver  bullion  to  be  transmitted  to  India 
for  coinage  purposes,  and  authorizing  further  the  counting 
of  such  bullion  in  transit  and  in  process  of  coinage  as  part 
of  the  Paper  Currency  Reserve.  In  this  way  the  holding 
of  a  part  of  the  Reserve  in  London  was  made  to  serve  a 
threefold  purpose:  (i)  The  provision  of  funds  in  the 
world's  central  silver  market  for  the  purchase  of  silver 
when  needed  for  the  coinage  of  new  rupees  —  one  of  the 
advantages  claimed  by  Lindsay  for  his  Plan.  (2)  The  use 
of  a  fund  in  London  to  support  Indian  exchange  when  the 
trade  balance  was  against  India  and  it  became  im- 
practicable, or  seriously  depressing  to  exchange,  to  sell 
council  bills.  In  such  contingency  the  Secretary  of  State 
could  have  passed  to  his  credit  gold  from  the  Paper 
Currency  Reserve  in  London,  in  lieu  of  selling  council  bills, 
and  could  transfer  from  his  funds  in  India  an  equivalent  to 
the  Indian  part  of  the  Paper  Currency  Reserve.  (3)  Its 


INDIAN  CURRENCY  FROM   1899  TO   1907  103 

use,  as  previously  noted,  as  a  fund  into  which  payments 
might  be  made  against  the  issue  of  currency  notes  in  India, 
thereby  preventing  exchange  from  rising  unduly  high  and 
leading  perhaps  to  the  undesirable  shipment  of  gold  to 
India.  By  Act  IX  of  1902  the  main  provisions  of  this 
legislation  were  made  permanent.  It  was  not,  however, 
until  the  fiscal  year  1906  that  the  policy  was  inaugurated 
of  keeping  part  of  the  gold  of  the  Paper  Currency  Reserve 
permanently  in  England.1  By  the  end  of  the  fiscal  year 
1905,  the  amount  of  gold  accumulated  in  the  Paper  Cur- 
rency Reserve  in  India  as  the  result  of  deposits  against 
the  payment  of  currency  notes  and  rupees  was  about  £11 
millions,  and  at  that  time  there  was  no  gold  to  the  credit  of 
the  Paper  Currency  Reserve  in  London.  This  appeared  to 
be  an  undue  proportion  of  gold  to  be  kept  in  the  Reserve 
in  India,  especially  since  the  amount  of  silver  in  the  Reserve 
in  India  was  running  very  low  —  only  about  half  as  much 
as  the  gold  —  and  the  demand  for  rupees  was  continuing 
strong.  Accordingly  £5  millions  were  shipped  to  London, 
and  "it  was  subsequently  decided  to  aim  at  holding  not 
less  than  that  amount  normally,  in  London."  2  Since  1906 
every  year  has  shown  a  substantial  part  of  the  Reserve  in 
the  form  of  gold  in  England.3 

The  authority  granted  early  in  1898,  therefore,  to  create 
temporarily  a  branch  of  the  Paper  Currency  Reserve  in 
London,  was  the  beginning  of  a  movement  which  soon 
became  strong  in  favor  of  transferring  India's  monetary 
reserves  to  London.  Once  transferred  there,  the  next 
step  was  to  invest  them  in  increasing  proportions  in  sterling 
securities  instead  of  keeping  them  in  the  form  of  "ear- 
marked" gold  in  the  Bank  of  England  or  in  the  form  of 

1  Cf.   table  showing  amount,  composition,  and  distribution  of  Paper 
Currency  Reserve,  annually,  1862-1913,  in  Rep.  Roy.  Com.  Ind.  Fin.  & 
Cur.,  App.  VIII,  pp.  248-249. 

2  Memorandum  of  Finance  Secretary,  in  Rep.  Roy.  Com.  Ind.  Fin.  & 
Cur.,  App.  VIII,  p.  242. 

8  Ibid.,  pp.  248-249. 


104  MODERN  CURRENCY  REFORMS 

ordinary  deposits  in  the  Bank.  How  this  tendency  showed 
itself  in  connection  with  a  second  reserve  —  The  Gold  Re- 
serve Fund  —  from  the  very  time  of  its  inauguration  will 
now  briefly  be  considered. 

The  Gold  Standard  Reserve.  The  paramount  object 
which  the  Fowler  Committee  set  before  the  Indian  Govern- 
ment and  which  that  Government  approved  was  "the  effec- 
tive establishment  of  a  gold  standard"  in  India.  It  will  be 
recalled  that  the  Committee  recommended  that  "fresh 
rupees  should  not  be  coined  until  the  proportion  of  gold  in 
the  currency  is  found  to  exceed  the  requirements  of  the 
public/'1  and  that  "any  profit  on  the  coinage  of  rupees 
.  .  .  should  be  kept  in  gold  as  a  special  reserve,  entirely 
apart  from  the  Paper  Currency  Reserve  and  the  ordinary 
treasury  balances."  The  Fowler  Committee  clearly  had  in 
mind  the  ultimate  use  of  this  gold  reserve  which  was  to 
be  accumulated  out  of  seigniorage  profits,  as  a  redemption 
fund  for  the  maintenance  of  the  parity  of  the  rupee  at  the 
i6d.  par.2  In  1900  the  Government  of  India  decided  that 
the  time  had  arrived  for  putting  into  effect  the  recom- 
mendation of  the  Fowler  Committee  to  form  a  special  gold 
reserve  from  the  profits  of  rupee  coinage.  It  put  forth  its 
proposals  in  a  dispatch  (No.  302)  of  September  6,  1900  to 
the  Secretary  of  State  for  India.3  This  dispatch,  together 
with  the  appended  minute  by  Sir  Edward  Law,  shows  that 
the  Government  of  India,  like  the  Fowler  Committee,  con- 
templated that  this  new  gold  reserve  should  be  a  redemp- 
tion fund  consisting  chiefly  of  gold  and  located  in  India ;  and 
that  the  Paper  Currency  Reserve  should  gradually  revert 
to  its  original  status  of  a  fund  consisting  chiefly  of  rupees  and 
securities  to  be  used  for  the  encashment  of  currency  notes.4 
In  the  above-mentioned  dispatch  the  Viceroy  said : 

1  Fowler  Com.  Rep.,  sec.  60. 

2  Ibid.,  sec.  59. 

3  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  App.  V,  pp.  109-111. 

4  "The  sole  object  for  which  the  Currency  Reserve  was  originally  consti- 
tuted was  to  provide  the  necessary  security  for  the  encashment  of  notes,  on 


INDIAN  CURRENCY  FROM   1899   TO   1907  105 

"We  .  .  .  consider  it  desirable  that  a  reserve  of  gold 
should  be  formed  outside  the  Currency  Reserve,  which  will 
supplement  the  stock  in  that  Reserve  for  the  present,  and 
will  in  time  take  the  place  of  that  stock  and  relieve  us  of 
the  necessity  for  keeping  anything  more  than  a  small 
amount  of  gold  in  the  Currency  Reserve ;  this  would  be  in 
accordance  with  the  view  of  Lord  Elgin's  Government 
that  the  Reserve  should  not  be  used  for  the  general  purposes 
of  our  exchange  policy.  We  consider  the  formation  of  a 
special  gold  reserve  to  be  an  object  of  sufficient  importance 
to  justify  the  ear-marking  of  the  receipts  from  profit  on 
coinage  as  proposed."  1 

It  is  unfortunate  that  this  recommendation  was  not  ap- 
proved by  the  home  authorities.  The  result  of  its  approval 
would  have  been  to  establish  a  reserve  fund  chiefly  of  gold, 
at  first  located  in  India  but  probably  later  transferred 
largely  to  London,  to  be  used  solely  for  the  maintenance 
of  the  parity  of  the  silver  rupee  with  gold  at  the  i6d.  rate ; 
and  the  ultimate  transformation  of  the  Paper  Currency 
Reserve  into  a  purely  note  issue  reserve  consisting  of  in- 
terest-bearing securities  and  silver  rupees,  much  like  the 
reserve  against  Bank  of  England  notes.  Under  this  ar- 
rangement the  function  of  each  reserve  would  have  been 
distinct  and  simple,  and  much  subsequent  confusion  and 
misunderstanding  would  have  been  avoided.  India,  more- 
presentation,  and  there  was  certainly  no  idea  of  utilizing  the  funds  so  held 
for  exchange  or  any  other  purpose  not  directly  connected  with  security  for 
the  note  issue.  .  .  .  The  fact  is  that  when  the  funds  in  the  Currency  Re- 
serve were  diverted  from  their  original  purpose  and  taken  as  providing 
security  for  the  maintenance  of  a  steady  exchange,  a  radical  and  perhaps  un- 
contemplated change  was  introduced,  and  at  the  risk  of  being  considered 
somewhat  conservative  I  would  venture  to  suggest  that  it  would  be  more 
prudent  to  revert,  as  far  as  possible,  to  the  original  conditions  as  regards 
the  treatment  of  these  funds."  To  this  end,  the  writer  of  the  above,  Sir 
Edward  Law,  advocated  the  removal  of  most  of  the  gold  from  the  Paper 
Currency  Reserve  and  the  substitution  for  it  of  rupees  and  securities.  The 
gold,  he  believed,  more  properly  belonged  in  the  "gold  exchange  fund." 
Cf.  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  App.  V,  pp.  117  and  119. 

1  Ibid.,  p.  in. 


106  MODERN  CURRENCY  REFORMS 

over,  in  her  subsequent  movement  in  the  direction  of  the 
Lindsay  Plan  would  probably  have  secured  a  more  thorough 
and  automatically  working  form  of  the  gold-exchange 
standard  than  the  one  she  has  actually  attained. 

The  Secretary  of  State,  however,  although  nominally 
accepting  the  main  provisions  of  the  Government  of 
India's  plan  for  the  creation  of  a  gold  reserve  out  of  the 
profits  of  coinage,  actually  modified  it  so  as  to  change 
the  character  of  the  reserve  from  a  gold  redemption  fund, 
for  the  maintenance  of  the  parity  of  the  rupee  with  gold  and 
the  adjustment  of  the  rupee  supply  to  the  demands  of  trade, 
to  a  surplus  fund  invested  in  sterling  securities  and  held  in 
London  as  a  sort  of  "secondary  reserve."  l  This  left  the 
real  work  of  maintaining  the  parity  to  the  Paper  Currency 
Reserve  and  the  Secretary  of  State's  sale  of  council  bills, 
with  the  result  that  the  three  funds,  viz.  the  Paper  Currency 
Reserve,  the  Gold  Reserve,  and  the  Secretary  of  State's 
balances,  soon  found  their  functions  confused,  the  properly 
fiscal  function  of  the  last  fund  and  the  properly  monetary 
functions  of  the  other  two  being  sadly  mixed. 

The  Gold  Reserve  Fund  was  established  without  legisla- 
tion during  the  fiscal  year  1901-02.  Into  it  were  to  be 
paid  all  profits  of  coinage  accruing  after  January  i,  ipoi.2 
The  Financial  Statement  of  1901-02  said  that  it  was  the  in- 
tention of  the  Government  "to  invest,  from  time  to  time, 
in  British  consols  or  other  sterling  securities,  the  sums  which 
may  be  accumulated  in  the  Gold  Reserve  Fund." 3  With 
the  exception  of  a  special  fund  equivalent  to  £4  millions 

1  Cf.  Dispatch  No.  232  of  Dec.  13,  1900.    Ibid.,  pp.  126-128. 

2  The  strain  on  the  Government's  finances,  due  to  famine,  led  the  Govern- 
ment to  use  the  seigniorage  profits  of  the  calendar  year  1900  for  current  re- 
quirements, but  with  January  i,  1901  it  commenced  paying  its  seigniorage 
profits  directly  into  the  Gold  Reserve.     This  earlier  diversion  of  seigniorage 
profits  for  current  fiscal  needs  led  to  much  criticism,  and  the  Government 
later  expressed  its  intention  of  paying  into  the  Reserve  as  soon  as  possible 
the  seigniorage  profits  of    1900  (i.e.  £1,730,000).    East  India  Fin.  Stat. 
1901-02,  p.  12. 

3  Ibid.,  sec.  83. 


INDIAN  CURRENCY  FROM    1899  TO   1907  107 

in  coined  rupees  created  in  1906,*  practically  the  entire 
Gold  Reserve,  which  by  April  i,  1907  had  grown  to  over  £13 
millions,  had  by  that  time  been  invested  in  British  and 
colonial  government  securities  and  Corporation  of  London 
bonds.2  Concerning  the  use  of  the  Gold  Reserve  Fund  the 
Indian  Government  said  in  the  Financial  Statement  of 
1903-04 : 

"It  will  only  be  when  the  temporary  curtailment  of  council 
bills  is  found  insufficient  to  check  a  fall  in  exchange,  and 
when  the  gold  in  the  Currency  Reserve  is  exhausted,  i.e., 
when  the  balance  of  indebtedness  is  seriously  adverse  to 
India  to  an  extent,  that  we  need  hardly  anticipate,  that 
any  serious  demand  can  arise  on  the  Gold  Reserve  Fund."3 

The  continued  heavy  demand  for  rupees,  however,  soon 
required  something  of  a  change  in  the  composition  and  func- 
tion of  the  Gold  Reserve  Fund,  and  led  to  a  change  in  its 
name.  The  Indian  Government  found  itself  threatened 
with  the  danger  of  not  being  able  to  secure  silver  and  to 
coin  rupees  fast  enough  to  meet  trade  requirements. 
Silver  had  to  be  procured  principally  from  abroad.  "From 
the  date  when  Government  decides  to  buy  silver  for 
coinage,  down  to  the  date  when  the  new  rupees  coined 
therefrom  become  actually  effective  for  meeting  the  trade 
demand,  there  is  an  interval  of  not  less  than  five  weeks, 
which  may  easily  be  exceeded."  To  meet  this  situation 
the  Government  arranged  to  maintain  a  special  Ingot  Re- 
serve of  silver  bullion  in  India  sufficient  to  coin  R.  30 
millions,  these  ingots  to  be  passed  through  several  of  the 
preliminary  stages  in  the  process  of  minting.  The  Reserve 
was  accumulated  by  November  1905,  and  was  to  be  used 

1  Cf.  infra,  pp.  129,  132-133. 

2  For  statement  showing  apportionment  and  location  of  Fund  each  year, 
1902-12,  see  Statistical  Abstract  relating  to  British  India,  48th  number 
(1915),  p.  85. 

3  East  India  Fin.  Stat.  1903-04,  p.  14. 

4  Ibid.,  1905-06,  p.  18. 


108  MODERN  CURRENCY  REFORMS 

only  in  times  of  emergency.  From  the  Financial  State- 
ment of  the  following  year l  we  learn  that  the  Ingot  Reserve 
proved  of  great  service,  but  that  the  demand  for  rupees 
became  so  large  that  the  Reserve  was  completely  exhausted 
by  the  middle  of  January,  and  that  it  was  decided  to  raise 
it  to  an  amount  sufficient  to  coin  R.  60  millions,  the  coin- 
ing of  which  would  keep  the  mints  fully  occupied  for  two 
months.  During  the  fiscal  year  1907-08,  the  demand  for 
rupees  continued  heavy  and  the  Ingot  Reserve  as  part  of 
the  Paper  Currency  Reserve  was  discontinued,  and  a  special 
silver  rupee  reserve  of  R.  60  millions  was  built  up  out  of  the 
profits  of  coinage  as  a  part  of  the  Gold  Reserve  Fund,  the 
name  of  this  fund  being  changed  to  Gold  Standard  Reserve 
Fund,  since  it  was  no  longer  composed  entirely  of  sterling 
securities  and  gold.2 

The  Circulation   of  Gold  Coin  in  India 

When  the  Indian  mints  were  closed  in  1893  the  Indian 
Government  offered  to  give  15  rupees  for  a  sovereign,  and 
this  rate  plus  the  expenses  incident  to  the  shipment  of  sover- 
eigns to  India  fixed  the  upper  limit  to  the  appreciation  of 
the  rupee  in  terms  of  gold.  We  have  found  that  early  in 

1898  gold  began  to  be  presented  in  India  for  rupees,  and 
that,  soon  after,  the  Government  began  to  receive  gold  in 
London  to  the  credit  of  the  Paper  Currency  Reserve  against 
payment  of  rupees  in  India.     The  Fowler  Committee  had 
recommended  that  the  sovereign  be  made  legal  tender  in 
India  —  a  recommendation  that  was  put  into  effect  in 

1899  (Act  XXII).     It  had  further  said: 

"Although  the  Government  of  India  should  not,  in  our 
opinion,  be  bound  by  law  to  part  with  its  gold  in  exchange 
for  rupees,  or  for  merely  internal  purposes,  we  regard  it  as 
the  principal  use  of  a  gold  reserve  that  it  should  be  freely 

1  East  India  Fin.  Stat.  1906-07,  pp.  17-18. 

2  Ibid.,  1907-08,  pp.  23-26. 


INDIAN  CURRENCY  FROM    1899  TO   1907  109 

available  for  foreign  remittances  whenever  the  exchange 
falls  below  specie  point;  and  the  Government  of  India 
should  make  its  gold  available  for  this  purpose,  when 
necessary,  and  under  such  conditions  as  the  circumstances 
of  the  time  may  render  desirable.  .  .  .  When  it  has 
accumulated  a  sufficient  gold  reserve,  and  so  long  as  gold 
is  available  in  its  treasury,  it  might  discharge  its  obligation 
in  India  in  gold,  instead  of  in  rupees."  l 

The  Fowler  Committee  had  declared  that  it  looked  forward 
to  the  time  when  the  sovereign  would  be  coined  and  circu- 
late at  home  and  in  India  " under  identical  conditions."  2 
This  opinion  was  shared  by  the  Government  of  India,  for 
the  Viceroy  had  said  in  a  dispatch  of  March  3,  1898  to 
the  Secretary  of  State  for  India : 

"We  think  that  the  only  state  of  things  which  can  be 
called  a  thoroughly  satisfactory  attainment  of  a  gold 
standard  is  one  in  which  the  gold  coins  which  represent 
our  standard  are  those  also  which  are  good  for  payments  in 
England.  .  .  .  What  we  ought  to  aim  at,  and  what  we  have 
every  prospect  of  successfully  attaining,  is  the  introduc- 
tion of  the  English  sovereign  itself  as  a  current  coin.  .  .  ."  3 

As  previously  noted,4  during  the  years  immediately 
following  the  attainment  of  the  i6d.  par,  the  demand  for 
rupees  became  so  strong  in  India  that  the  Government 
was  nearly  "swamped  (temporarily)  by  gold."  5  During 
the  fiscal  year  1900-01,  the  Government  decided  as  a  tenta- 
tive measure  to  hold  £5  millions  in  its  reserve  in  times  of  low 
balances  and  to  pay  out  any  gold  it  received  in  excess  of 
this  minimum.  On  this  basis  it  began  to  pay  out  gold  in 

1  Fowler  Com.  Rep.,  sec.  59. 

2  Ibid.,  sec.  54. 

3  Corresp.  resp.  Proposals  on  Cur.  Made  by  Govt.  of  India,  1898.     Cd. 
8840,  pp.  lo-n. 

4  Supra,  p.  100. 

6  East  India  Fin.  Stat.  1900-01,  p.  217. 


110  MODERN  CURRENCY  REFORMS 

exchange  for  rupees  on  January  15,  1901.  Concerning  the 
practice,  the  Financial  Statement  of  1900-01  said : 

"  Government  has  no  intention  of  forcing  gold  upon  a 
reluctant  public,  although,  now  that  the  public  has  spon- 
taneously taken  a  certain  number  of  sovereigns,  we  thought 
it  was  not  unjustifiable  to  familiarize  people  more  widely 
with  gold  by  cashing  postal  orders  in  presidency-towns  of 
the  value  of  R.  15  or  £i  in  gold  coins,  and  we  also  propose  to 
pay  certain  salaries  in  gold  in  the  presidency- towns."  l 

After  saying  that  the  Government  was  paying  out  gold  to 
anybody  who  asked  for  it  the  Financial  Statement  con- 
tinued : 

"  Whether  we  shall  be  able  to  continue  to  do  so  without 
check  or  interruption,  whether  now  we  have  once  started 
giving  gold  for  rupees  we  may  not  have  to  suspend  tem- 
porarily, is  not  a  matter  about  which  confident  prediction 
can  be  made.  But  it  would  be  reasonable  to  say  that  the 
auguries  are  not  unfavorable  for  our  being  able  to  pursue 
the  path  on  which  we  have  entered." 

The  figures  cited,  however,  showed  that  from  January  15 
to  March  10  only  £130,700  had  been  taken  voluntarily 
from  the  currency  offices  by  persons  presenting  notes. 
The  subsequent  absorption  of  gold  into  the  active  circulation 
was  very  slow  and  was  practically  limited  to  a  few  districts. 
This  same  Financial  Statement  (of  1900-01)  said  that  the 
Government  had  decided  to  constitute  a  branch  of  the 
Royal  Mint  at  the  Bombay  Mint  for  the  coinage  of  gold, 
that  the  terms  had  been  settled,  and  that  "we  are  merely 
awaiting  now  until  the  Royal  Mint  has  satisfied  itself  as 
regards  the  Mint  premises  and  appliances  at  Bombay.  A 
representative  of  the  Royal  Mint  is  starting  this  week  for 
Bombay  to  report."  2  Up  to  the  present  writing  (May 
1916),  however,  the  Indian  mints  have  not  been  opened 

1  East  India  Fin.  Stat.,  1900-01,  p.  19. 

2  Ibid.,  p.  19. 


INDIAN   CURRENCY  FROM    1899  TO   1907  III 

to  the  free  coinage  of  gold  —  a  subject  to  which  we  shall 
return  later.1 

In  June  1907,  a  few  months  before  the  great  crisis  of  that 
year  struck  India,  a  committee  appointed  by  the  Secretary 
of  State  to  investigate  the  subject  of  Indian  railway  finance 
recommended  that  in  lieu  of  extra  borrowing  the  urgent 
need  of  additional  rolling  stock  and  other  improvements 
be  met  by  the  diversion  from  the  Gold  Standard  Reserve 
of  £1,000,000  out  of  the  profits  on  the  coinage  of  rupees  in 
1907.  Although  the  Gold  Standard  Reserve  in  its  incep- 
tion was  intended  to  be  a  monetary  reserve,  they  errone- 
ously but  naturally 2  attributed  to  it  an  essentially  fiscal 
function,  reasoning  that  the  object  of  the  Reserve  was  "to 
enable  the  Government  of  India  and  the  Secretary  of  State 
to  meet  their  sterling  obligations  in  the  event  of  a  falling 
off  in  the  demand  for  council  bills."  Combining  the  gold 
and  the  gold  securities  in  the  Gold  Standard  Reserve  and 
the  Paper  Currency  Reserve,  the  Committee  concluded  that 
in  addition  to  60  million  silver  rupees  there  was  at  that 
time  "a  fund  of  upwards  of  £23,000,000  in  sterling  se- 
curities and  gold  bullion  which  could  be  drawn  upon  in 
case  of  necessity."  3  This  sum  it  believed  was  sufficient  to 
justify  the  diversion  of  the  £1,000,000  of  additional  seignior- 
age profits  to  railway  expenditures.  The  Secretary  of  State 
for  India,  however,  was  more  than  pursuaded ;  for,  despite 
very  strong  protests  in  India,  he  directed  that  for  the  fu- 
ture one  half  of  any  profits  on  the  coinage  of  rupees  should 
be  used  for  capital  expenditure  on  railways  until  the  Gold 
Standard  Reserve  reached  £20  millions.  It  seems  to  have 
been  contemplated  that  after  that  total  had  been  reached 
all  the  profits  on  silver  coinage  should  be  diverted  from  the 
Reserve.4  The  Secretary  diverted  £1,123,000  in  this  way, 

1  Infra,  pp.  143-146. 

2  This  was  a  natural  error  in  view  of  the  Government's  confusion  of 
the  functions  of  the  Secretary  of  State's  balances  and  of  the  two  monetary 
reserves,  as  previously  noted.     Supra,  pp.  104-106. 

*  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  sec.  35.  4  Ibid.,  sec.  36. 


112  MODERN  CURRENCY  REFORMS 

and  refused  to  follow  the  recommendations  of  the  Govern- 
ment of  India  in  favor  of  accumulating  the  sterling  securi- 
ties in  the  Gold  Standard  Reserve  to  £20  millions  before 
diverting  any  further  seigniorage  profits  to  railway  capital 
expenditure.  In  a  telegram  of  July  2,  1907  to  the  Indian 
Government  the  Secretary  said:  "The  danger,  which  you 
allege,  of  a  fall  in  the  rate  of  exchange  I  regard  as  illusory, 
having  regard  to  the  present  conditions  of  trade,  the  amount 
of  securities  in  the  Gold  Standard  Reserve,  and  of  gold  in 
the  Currency  Reserve."  l 

The  situation,  however,  was  suddenly  changed  by  the 
crisis  of  1907. 

1  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  App.  V,  p.  159. 


CHAPTER  VI 

CRISIS  OF  1907-1908 

IN  the  latter  part  of  1907  and  the  forepart  of  1908  the 
Indian  gold  standard  was  put  to  its  first  severe  test.  From 
the  attainment  of  the  i6d.  par  in  1898  to  August  1907, 
exchange  rates  had  fluctuated  between  the  "gold  points," 
and  the  demand  for  new  rupees  had  been  so  strong  that  the 
greater  part  of  the  time  exchange  had  ruled  above  ibd.1 
Beginning  with  August  1907,  there  occurred  for  India  a 
combination  of  unfortunate  circumstances  that  brought 
the  country  to  the  verge  of  a  financial  panic  and  forced 
exchange  slightly  below  the  gold-export  point  —  in  other 
words  caused  a  temporary  depreciation  in  the  unit  of  value. 
This  crisis  led  to  important  changes  in  the  Indian  currency 
system. 

There  were  several  important  forces  leading  to  the  slump 
in  Indian  exchange  rates  and  to  the  unprecedented  demands 
on  India's  gold  reserves.  They  were:  (i)  Unfavorable 
prospects  for  the  jute  trade.  "The  crop  [in  August  1907] 
was  expected  to  be  a  good  one,  but  prices  had  fallen  greatly, 
buyers  were  holding  off,  and  there  was  no  outflow  of  money 
into  the  jute  districts  as  in  the  previous  year."  2  (2)  De- 

1  In  ii  of  the  16  half-year  periods,  1899-1900  to  1906-07,  the  average 
rate  for  the  Secretary  of  State's  drawing  of  bills  and  telegraphic  transfers 
was  above  i6d.,  and  the  lowest  half-yearly  average  for  the  other  five  half- 
years  was  15.93^.     Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  App.  VII,  Table  III. 

2  East  India  Fin.  Stat.,  1908-09,  p.  22. 

Jute,  raw  and  manufactured,  is  normally  India's  greatest  export.  From 
£28.4  millions  in  1906-07  the  exports  of  jute  fell  to  £24.2  millions  in 
1907-08.  Stat.  Abs.  relating  to  Brit.  India,  48th  number,  1915,  p.  192. 

1  "3 


114  MODERN  CURRENCY  REFORMS 

ficient  rains.  By  September  it  became  apparent  that  the 
fall  rains  were  deficient  over  a  large  part  of  India  and  par- 
ticularly in  the  wheat-growing  provinces,  and  by  the  end  of 
October  it  was  clear  that  the  export  trade  in  wheat  would 
be  insignificant.  Cotton  was  uncertain,  and  there  were 
prospects  "that  much  of  the  Burma  rice  might  have  to  be 
diverted  to  India  instead  of  going  abroad."  1  (3)  Financial 
crisis  in  the  United  States.  In  the  latter  part  of  October 
the  financial  crisis  occurred  in  the  United  States  with  its 
consequent  heavy  demands  upon  the  gold  of  the  rest  of  the 
world.  The  Bank  of  England  raised  its  discount  rate  on 
November  4th  to  6  per  cent  and  on  November  7th  to  7  per 
cent  —  the  first  7  per  cent  rate  since  1873.  (4)  Famine. 
The  failure  of  the  monsoon  in  the  autumn  of  1907  threatened 
famine  for  a  large  section  of  India,  and  within  a  short  time 
a  disastrous  famine  broke  out,  covering  districts  containing 
a  population  of  approximately  49  million  people.2  (5)  De- 
cline in  gold  price  of  silver.  For  the  period  1903-07  In- 
dia's monetary  demand  for  silver  had  been  the  chief 
factor  in  causing  the  phenomenally  high  price  of  the  white 
metal.3  It  soon  became  apparent  that  India  would  not 
only  cease  to  buy  silver  for  monetary  purposes,  but  that 
she  might  actually  have  substantial  supplies  to  unload 
on  the  market.  Considering  the  extreme  sensitiveness  of 
the  silver  market  in  recent  years  it  was  not  surprising  that 
there  should  be  a  sudden  collapse  in  the  price  of  the  white 
metal.  The  average  monthly  price  of  standard  silver  in 
London  fell  from  31.68^.  for  August  1907  to  26. 24^.  for 
December  1907.  This  decline  in  the  price  of  silver  for 
ornaments,  trinkets,  and  the  like,  was  a  stronger  temptation 
than  the  natives  of  India  (outside  of  the  famine  districts) 
could  stand,  and  India's  unfavorable  trade  balance  was 

1  East  India  Fin.  Stat.,  1908-09,  pp.  22-23. 

2  Ibid.,  p.  3. 

3  Kemmerer,  The  Recent  Rise  in  the  Price  of  Silver,  etc.,  in  Quar.  Journ. 
Econ.,  XXVI,  1912,  p.  230. 


CRISIS  OF   1907-1908  115 

rendered  worse  by  large  importations  of  silver  bullion,  with 
the  effect  of  still  further  weakening  exchange.1 

One  of  the  first  results  of  the  events  of  October  and 
November  1907  was  the  destruction  of  the  Secretary  of 
State's  market  for  council  bills.  On  November  6th  tenders 
for  council  bills  dropped  to  i5ff</.,  and  the  Secretary  of 
State  sold  only  a  very  small  amount. 

"  Thereafter  for  five  weeks  he  practically  withdrew  from 
the  market  altogether;  but  the  scarcity  of  gold  and  the 
absence  of  exports  continued,  and  exchange  ceased  to  be 
stagnant  and  moved  steadily  downwards.  On  the  i3th 
November  it  fell  to  1-3!!,  on  the  ^th  to  1-3!,  and  on 
the  25th  to  i-3fg-.  This  was  the  lowest  point  reached 
during  the  crisis."  2 

It  was  a  point  at  least  -f^d.  below  the  gold-export  point, 
and  represented  a  depreciation  to  that  extent  in  the  gold 
value  of  India's  monetary  unit. 

How  Did  the  Government  Meet  the  Emergency? 

To  meet  this  emergency  the  Government  adopted 
several  measures : 

First.  As  already  noted,  the  Secretary  of  State  reduced 
his  sales  of  council  bills  and  then  for  a  period  of  five  weeks 
practically  discontinued  them.  Inasmuch  as  the  sale  of 
council  bills  acts  upon  Indian  exchange  like  an  equivalent 
amount  of  Indian  imports,  and  as  the  encashment  of  the 
bills  from  the  treasury  funds  in  India  releases  money  from 
government  depositories,  the  practical  discontinuance  of 
sales  tended  to  harden  exchange  rates.  This  advantage, 
however,  was  gained  at  the  fiscal  disadvantage  of  cutting  off 

1  In  October  1907,  said  the  East  India  Financial  Statement  of  1909-10 
(p.  19) :  "London  despatched  to  Bombay  the  largest  shipment  [of  silver], 
I  am  told,  which  had  ever  left  England  for  India;    and  this  record  was 
again  broken  in  December." 

2  East  India  Fin.  Stat,  1908-09,  p.  23. 


Il6  MODERN  CURRENCY  REFORMS 

the  Secretary  of  State's  income  for  meeting  India's  fixed 
charges  in  London.  To  provide  him  with  funds  in  London, 
it  became  necessary  between  November  25th  and  Decem- 
ber 1 8th  to  transfer  to  him  £2^  millions  from  the  currency 
chest  in  London  in  exchange  for  an  equivalent  rupee  credit 
passed  to  the  Paper  Currency  Reserve  in  India.1 

Second.  The  second  step  was  to  abandon  the  policy 
which  had  been  in  operation  for  about  seven  years  of  paying 
out  gold  freely  on  demand  in  exchange  for  rupees.  On  this 
subject  the  Finance  Member  of  the  Viceroy's  Council  said 
that  the  Government  of  India  was  approached  by  different 
parties  who  wished  to  find  out  if  it  would  be  willing  to 
issue  sovereigns  in  exchange  for  rupees  at  the  rate  of  i6d., 
the  understanding  being  that  the  sovereigns  were  wanted 
for  export.  The  matter,  he  said,  was  fully  considered  and 

"the  theoretical  arguments  in  favour  of  a  liberal  issue  of 
gold  as  an  antidote  to  a  fall  in  exchange  were  freely  ad- 
mitted. But  it  was  felt  very  strongly  that  the  depression 
was  not  due  exclusively  to  the  contraction  of  exports. 
The  demand  for  gold  was  made  in  part  in  the  interest  of 
our  own  trade ;  but  it  was  also  due  in  great  measure  to  the 
American  crisis  and  the  latter  factor  was  clearly  one  that 
had  to  be  seriously  reckoned  with.  .  .  .  Our  whole  supply 
of  gold  [in  India]  was  only  about  3!  millions  [pounds],  of 
which  only  some  2  millions  was  at  Bombay  and  Calcutta, 
and  this  was  already  being  drawn  off  at  the  rate  of  about 
£400,000  a  month  for  internal  consumption.21  Had  we  com- 
plied with  the  demand  for  issues  without  limit,  the  whole 
available  supply  might  have  been  drawn  off  in  a  few  weeks, 
and  we  should  then  have  been  forced  to  discontinue  them, 
with  the  possible  result  of  precipitating  a  panic.  For 
these  reasons,  we  decided  to  stand  by  our  legal  rights. 
We  are  not  bound  to  give  sovereigns  in  exchange  for  rupees, 
except  at  our  own  convenience,  and  we  do  so  primarily 
only  to  foster  the  internal  use  of  gold.2  The  currency  offices 

1  East  India  Fin.  Stat.,  1908-09,  p.  23. 

2  Italics  are  mine. 


CRISIS  OF   1907-1908  117 

were  accordingly  instructed  not  to  issue  gold  in  larger  quanti- 
ties than  £10,000  to  any  individual  on  any  one  day."  * 

Third.  The  third  measure,  and  by  far  the  most  im- 
portant one  because  of  its  bearings  on  India's  monetary 
future,  was  a  notification  given  to  the  presidency  banks 
the  latter  part  of  December  but  not  made  public, 

"  that,  if  exchange  (which  in  the  meantime  had  recovered) 
should  again  fall  below  gold  export  point,  telegraphic 
transfers  on  London  should  be  offered  for  sale  in  India  at  a 
fixed  rate.  .  .  .  The  amount  of  transfers  was  to  be  limited 
to  a  defined  though  reasonably  substantial  figure,  and 
Government  reserved  to  itself  the  fullest  discretion  to  with- 
draw the  offer  at  any  moment  without  notice.  The  arrange- 
ment remained  in  force  till  the  last  days  of  February  [1908], 
but  no  occasion  arose  for  putting  it  into  operation.  At  the 
end  of  that  month  it  was  modified  ...  to  the  extent  that 
bills  on  London  would  be  offered  for  sale,  instead  of  [tele- 
graphic] transfers,  the  rate  being  suitably  modified."  2 

Trade  conditions  continued  strongly  unfavorable  during 
the  first  seven  and  a  half  months  of  the  calendar  year  igo8.3 
On  the  25th  of  March  exchange  again  dropped  below  the 
gold-export  point, 

"and  on  the  following  morning  a  notice  was  published  that 
the  Government  of  India  were  prepared  to  sell  sterling  bills 
on  London  at  is.  3ff^.,  UP  to  a  limit  of  £500,000.  The 
offer  was  continued  until  the  close  of  the  famine  and  the 
improved  agricultural  prospects  restored  exchange  to 
'normal  health.  The  practice  was  to  offer  £500,000  every 
week,  raising  the  amount  to  £1,000,000  on  occasions  when 
the  market  seemed  to  require  additional  assistance.  There 
were  only  two  weeks  in  which  the  tenders  exceeded  our 
allotments,  and  it  is  believed  that  the  requirements  of  all 

1  East  India  Fin.  Stat,  1908-09,  p.  23. 

2  Ibid.,  pp.  23-24. 

8  Cf.  East  India  Fin.  Stat.,  1909-10,  p.  19. 


n8 


MODERN   CURRENCY  REFORMS 


genuine  remitters  were  adequately  met.  Applications  for 
bills  stopped  in  the  middle  of  August.  .  .  ."  1 

During  the  five  months  April  to  August  1908  the  Gov- 
ernment sold  these  "  re  verse  council  bills"  to  a  total  amount 
of  £8,058,000,  resulting  in  the  withdrawal  from  circulation 
of  R.  1 20  millions. 

For  the  purpose  of  effecting  this  redemption  of  rupees 
and  their  withdrawal  from  circulation,  the  Government 
utilized  only  the  gold  in  the  Paper  Currency  Reserve  in 
India  and  in  England,  which  it  considered  its  first  line  of 
defense,  down  to  the  latter  part  of  March  1908  ;  but  during 
the  succeeding  five  months  the  Gold  Standard  Reserve 
was  drawn  upon  heavily,  and  securities  in  that  Reserve  to 
the  face  value  of  £8,100,497  were  sold,  while  at  the  same 
time  all  accruing  interest  was  disbursed. 

The  net  changes  in  the  two  reserves  are  shown  in  the 
following  table  compiled  by  Dr.  H.  R.  Read  from  figures 
furnished  him  by  the  Indian  Office  in  London.2 


PAPER  CURRENCY  RESERVE 


SECURITIES 
(PURCHASE  PRICE) 

COIN  AND  BULLION 

In  India 

In  England 

DATE 

Held  in 
India 

Held  in 
England 

Gold 
Coin  and 
Bullion 

Silver 
Coin 

Silver 
Bullion 
under 
Coinage 

Gold 
Coin 
and 
Bullion 

Silver 
Bullion 

Silver 
Bullion 
in 
Transit 

Rupees 

Rupees 

Rupees 

Rupees 

Rupees 

Rupees 

Rupees 

Rupees 

000,000 

000,000 

000,000 

ooo.ooo 

000,000 

000,000 

000,000 

000,000 

July     31, 

1907 

IOO.O 

2O.O 

60.1 

214.1 

5-7 

93-i 

IO.2 

August  3  1, 

1908 

100.0 

2O.O 

14-3 

285.4 

7-9 

25-6 

1  East  India  Fin.  Stat.,  1909-10,   p.  19. 

2  Unpublished  doctoral  dissertation  on  The  Development  of  a  Qualified 
Gold  Exchange  Standard  in  India,  p.  1 78. 


CRISIS  OF   1907-1908 
GOLD  STANDARD  RESERVE 


119 


DATE 

SILVER  PORTION  OF  FUND 
IN  INDIA 

NOMINAL  VALUE  OF  SECUR- 
ITIES HELD  IN  ENGLAND 

July  31,  1907    .      .      . 
August  31,  1908     .     . 

Rupees  000,000 
60.0 
172.5 

£  000,000 
14.4 
7-3 

FUNDS  OF  SECRETARY  OF  STATE  FOR  INDIA 


DATE 

CASH  BALANCES  IN  INDIA 

HOME  TREASURY  BALANCES 

July  31,  1907    .      .      . 
August  31,  1908     .     . 

Rupees  000,000 
171.4 
155-0 

£000,000 
6.0 
1.8 

The  striking  facts  brought  out  by  this  table,  if  one  com- 
bines the  two  reserves,1  are  :  (i)  The  great  depletion  of  the 
gold  —  coin  and  bullion  —  (held  exclusively  in  the  Paper 
Currency  Reserve),  both  in  India  and  England.  The  total 
amount  declined  from  R.  153.2  millions  (£10.2  millions), 
July  31,  1907  to  R.  39.9  millions  (£2.7  millions),  August 
31,  I9o8.2  (2)  The  decline  in  the  security  portion  of  the 
Gold  Standard  Reserve  from  a  nominal  value  of  R.  216 
millions3  (£14.4  millions)  to  R.  109.5  millions  (£7.3  mil- 
lions). (3)  The  maintenance  without  impairment  of  the 
nominal  value  of  the  security  portion  of  the  Paper  Cur- 
rency Reserve  at  R.  120  millions  (£8  millions).  (4)  The 
phenomenal  increase  in  the  reserve  holdings  of  silver  coin 
and  bullion.  These  holdings  increased  from  R.  290  mil- 

1  In  this  emergency  the  two  reserves  (viz.  Paper  Currency  Reserve  and 
Gold  Standard  Reserve)  were  used  for  essentially  the  same  objects  and  for 
our  purposes  may  be  considered  as  one  reserve. 

2  The  Indian  "Home  Treasury"  balances  of  gold  also  declined  from  about 
£6  millions  to  £1.8  millions. 

3  This  is  the  cost  price.    Doubtless  there  was  some  depreciation  during  the 
crisis,  but  for  that  data  are  not  given. 


120  MODERN  CURRENCY  REFORMS 

lions  (£19.3  millions),  July  31,  1907  to  R.  466  millions 
(£31.1  millions),  August  31,  1908. 

At  the  end  of  the  crisis  therefore,  it  will  be  observed, 
the  Government  held  in  its  two  reserves  £2.7  millions  in 
gold  coin  and  bullion,  over  £15  millions  in  securities  (rupee 
and  sterling),  and  176  millions  of  rupees  in  excess  of  what 
it  held  July  31,  1907,  an  amount  which  if  sold  as  bullion 
would  have  yielded  to  the  reserves  probably  at  least  £4 
millions  in  gold.1  Furthermore,  the  rupees  redeemed  by 
this  £4  millions  could  likewise  have  been  melted  and  sold 
as  bullion,  thereby  replenishing  the  reserve  —  a  procedure 
which  in  extreme  emergency  could  have  been  continued  for 
some  time,  although  there  would  have  been  an  obvious 
limit.  The  figures  show  clearly,  however,  that  at  the  end 
of  the  crisis  the  Indian  Government  still  possessed  a  sub- 
stantial reserve  power  and  that  it  could  have  withstood  a 
much  severer  crisis.  None  the  less,  the  lesson  that  the 
Government  wisely  drew  from  the  crisis  was  that  sub- 
stantial additions  to  its  gold  reserves  should  promptly  be 
accumulated.2 

In  this  emergency  did  the  Indian  Government  measure  up 
fully  to  its  responsibilities  ?  The  answer,  I  believe,  must  be 
in  the  negative.  The  Government's  unwillingness  to  com- 
mit itself  positively  to  the  redemption  of  rupees  on  demand 
in  unlimited  quantities  greatly  weakened  public  confidence. 
When  the  stability  of  the  country's  unit  of  value  is 
threatened  it  is  the  Government  and  not  the  business  pub- 
lic that  should  "walk  the  floor."  In  England,  a  generation 
ago,  Walter  Bagehot  made  "current"  the  philosophy  that 

1  This  sum  of  rupees  at  full  weight  would  have  contained  47.3  million 
ounces  of  British  standard  silver.     The  lowest  price  of  prompt  silver  in 
London  for  the  period  January- August  1908  was   23!^.  per  ounce.     If 
one  should  discount  this  arbitrarily  by  10  per  cent  to  allow  for  the  depress- 
ing influence  on  the  market  of  heavy  rupee  sales,  for  abrasion,  and  for 
forward  delivery,  he  would  arrive  at  £4,191,000  as  the  proceeds  of  the  sale 
of  these  rupees  as   silver. 

2  Cf.  The  Gazette  of  India,  Extraordinary,  March  22,  109,  pp.  19-26. 


CRISIS  OF   1907-1908  121 

in  the  time  of  threatened  panic  the  Bank  of  England  should 
give  the  public  to  understand  that  it  would  lend  freely  to 
all  responsible  applicants  who  would  pay  the  price.  Only  in 
that  way  could  confidence  promptly  be  restored.  The  same 
principle  should  have  been  applied  in  India  in  the  early 
part  of  the  crisis  of  1907,  and  had  it  then  been  applied 
promptly  and  vigorously  the  demands  upon  the  reserves 
would  probably  have  been  much  smaller  than  they  actually 
were,  and  India  would  almost  certainly  not  have  been 
humiliated  by  having  its  currency  actually  depreciate,  even 
for  a  day. 

The  policy  of  redeeming  the  rupees  in  India  in  gold  need- 
lessly increased  the  Government's  burden,  for  it  resulted, 
as  Lindsay  previously  had  prophesied,1  in  large  demands 
for  gold  being  made  for  hoards  and  internal  circulation, 
which  depleted  the  reserve  without  helping  in  any  con- 
siderable degree  the  exchange  situation.  Had  India  from 
the  start  accumulated  its  gold  reserves  in  London  and 
limited  its  redemption  of  rupees,  under  an  official  public 
announcement,  to  the  sale  on  demand  to  all  comers  of 
sterling  drafts  at  the  gold-export  point,  without  limit  as  to 
quantity,  the  demand  for  gold  for  hoarding  and  for  internal 
circulation  would  have  been  eliminated  from  the  demand 
on  the  reserves,  and  a  smaller  sum  would  almost  certainly 
have  been  required  for  the  maintenance  of  the  parity  of  the 
rupee.  It  will  be  recalled  that  Lindsay's  careful  estimate 
showed  that  a  gold  reserve  of  £10  millions  under  his  Plan 
could  have  provided  under  extreme  circumstances  for  the 
redemption  and  withdrawal  from  circulation  of  R.  200 
millions.2  In  this  crisis  of  1907-08  the  amount  withdrawn 
was  but  R.  176  millions,  while  the  available  redemption 
funds  (gold  and  gold  securities)  in  the  two  reserves  at  the 
end  of  the  crisis  were  much  larger  than  £10  millions,  i.e. 
£16.6  millions3  (nominal  value),  exclusive  of  the  securities 
held  in  India. 

1  Cf.  supra,  p.  91.    2  Cf.  supra,  pp.  87-88.    3  Cf.  supra,  Table,  pp.  118-119. 


122  MODERN   CURRENCY  REFORMS 

One  of  the  most  successful  measures  adopted  by  the 
Indian  Government  to  meet  the  crisis  of  1907-08  was  the 
belated  one  of  redeeming  rupees  in  sterling  drafts  on 
London,  at  the  exchange  rate  representing  the  gold-export 
point,  and  the  withdrawal  from  circulation  of  the  rupees 
received  in  payment  for  such  drafts.  Prior  to  the  crisis, 
it  will  be  recalled,  the  Government  had  been  paying  out 
rupees  and  rupee  notes  in  India  against  deposits  of  gold  in 
the  Paper  Currency  Reserve  in  London  at  rates  represent- 
ing India's  gold-import  point,  and  as  early  as  1904  the 
Secretary  of  State  had  announced  his  willingness  to  sell 
council  bills  in  unlimited  amounts  at  the  rate  of  i6^d. 
The  plan  now  adopted,  as  a  result  of  the  difficulties  of 
1907-08,  of  selling  " reverse  council  bills"  provided  for 
conversion  in  the  opposite  direction,  i.e.  the  conversion 
of  rupees  into  gold  drafts.1  Henceforth  the  Indian  cur- 
rency could  be  contracted  as  well  as  expanded  by  the 
draft  selling  mechanism,  and  the  gold  value  of  the 
rupee  could  thereby  be  maintained  between  the  gold 
points.  Thus  were  adopted  the  essential  features  of 
the  Lindsay  Plan  which  had  been  formally  rejected  a 
decade  previous.  But  the  adoption  of  this  system  of  re- 
demption was  only  a  half-hearted  one.  There  were  no 
commitments  to  redeem  on  demand,  the  functions  of 
the  two  reserve  funds  and  of  the  Secretary  of  State's 
cash  balances  were  still  confused,  and  the  policy  of  keep- 
ing a  gold  reserve  in  India  was  by  no  means  given  up. 
The  rates,  moreover,  at  which  drafts  should  be  sold  in 
either  direction  were  not  statutory  but  purely  administra- 

1  Previously  when  exchange  had  turned  strongly  against  India  the  policy 
of  the  Secretary  of  State  had  been  either  to  limit,  or  discontinue  temporarily, 
the  sale  of  council  bills.  If  this  did  not  restore  the  rate,  the  shipment  of 
gold  from  India  by  the  Government  to  meet  the  Secretary  of  State's  require- 
ments, commercial  shipments  of  gold  by  private  individuals,  and  the  diver- 
sion to  England  of  gold  in  process  of  shipment  from  Australia  to  India 
usually  quickly  forced  exchange  back  in  the  direction  of  par.  Cf .  East  India 
Fin.  Stat.,  1902-03,  p.  13. 


CRISIS  OF   1907-1908  123 

tive,  and  the  efforts  were  apparently  to  be  continued  of 
encouraging  the  circulation  of  gold  coin  in  India.  None 
the  less  a  long  step  had  been  taken  in  the  direction  of  Lind- 
say's gold-exchange  standard,  and  other  steps  in  that  direc- 
tion were  soon  to  follow. 


CHAPTER  VII 

INDIAN  CURRENCY  SINCE  THE  CRISIS  or  1907-1908 

SINCE  India's  fairly  successful  weathering  of  the  crisis 
of  1907-08,  her  currency  problem  has  centered  chiefly  in : 
(i)  The  Gold  Standard  Reserve:  its  enlargement,  loca- 
tion, change  in  form  so  as  to  render  it  more  readily  mobiliz- 
able  in  times  of  emergency ;  and  the  placing  upon  a  more 
definite  basis  of  the  system  of  redemption  in  drafts.  (2)  In- 
crease in  the  issue  of  the  currency  notes,  and  a  further 
movement  in  the  direction  of  the  universalization  of  the 
smaller  denominations ;  also  changes  in  the  character  and 
location  of  the  Paper  Currency  Reserve.  (3)  A  moderate 
increase  in  the  use  of  gold  coins  in  the  Indian  circulation, 
and  agitation  in  favor  of  further  extending  the  use  of  gold 
coins  in  India  and  of  opening  the  Indian  mints  to  the 
coinage  of  gold  —  either  sovereigns  or  lo-rupee  pieces. 
(4)  The  consideration  of  various  proposals  for  banking 
reform  in  India  and  particularly  proposals  for  the  establish- 
ment of  a  central  bank. 

The  balance  of  this  paper  will  consist  of  a  brief  discussion 
of  the  first  three  of  these  topics.  The  fourth  topic  is  some- 
what aside  from  the  main  subject  of  the  paper  and  is  too 
large  to  be  considered  within  the  limits  of  a  brief  essay  on 
Indian  currency.1  In  1913  another  Government  Com- 
mission made  a  careful  study  of  India's  currency  and  bank- 
ing problems  and  issued  a  voluminous  report,  which  has 
already  been  frequently  cited  in  this  book.2  The  report, 

1  For  valuble  discussion  of  this  topic  see  Memorandum  by  J.  M.  Keynes 
on  Proposals  for  the  Establishment  of  a  State  Bank  in  India.     Annexed  to 
Report  of  Royal  Commission  on  Indian  Finance  and  Currency. 

2  Report  of  the  Royal  Commission  on  Indian  Finance  and  Currency, 
House  of  Commons,  Sessional  Papers,  1914,  Vol.  XX. 

124 


INDIAN  CURRENCY  SINCE  THE  CRISIS  OF   1907-1908     125 

together  with  the  minutes  of  the  hearings  and  the  appen- 
dices, is  a  mine  of  information  concerning  the  more  recent 
years  of  India's  currency  experience,  and  from  it  will  be 
drawn  many  of  the  facts  given  in  the  following  pages. 

The  Gold  Standard  Reserve 

The  crisis  of  1907-08  taught  the  authorities  several  les- 
sons concerning  the  reserve  funds : 

Reserve  Funds  too  Small.  The  first  lesson  was  that  the 
reserve  funds  were  inadequate  for  the  task  imposed  upon 
them.  It  was  not  that  the  reserves  were  exhausted  by  the 
crisis ;  for,  as  we  have  seen,  there  were  substantial  gold  funds 
when  the  storm  passed  —  about  £16.6  millions  in  gold  and 
gold  securities  (exclusive  of  £1.8  millions  in  the  Secretary  of 
State's  home  treasury  balance).  The  trouble  was  that  the 
demand  had  been  so  heavy  as  to  cause  great  anxiety  on 
the  part  of  the  Government,  lead  it  to  refuse  to  give  in 
exchange  for  rupees  all  the  gold  or  gold  exchange  requested 
by  the  public,  and  to  cause  a  great  decline  in  the  public's 
confidence  in  the  stability  of  the  Indian  gold  standard. 
Furthermore,  it  was  felt  that  this  crisis,  while  a  severe  one, 
was  by  no  means  as  severe  as  might  come  in  the  future. 
In  1907-08  the  storm  center  of  the  crisis  was  New  York, 
the  Indian  summer  monsoon  failed,  and  the  famine  was 
limited  to  one  section  of  India.1  If  this  crisis  caused  a 
maximum  reduction  in  India's  gold  reserves  (i.e.  gold  and 
gold  securities)  of  over  £14  millions  —  £18  millions  if  one 
should  include  the  decline  in  the  gold  portion  of  the  Secre- 
tary of  State's  home  balances  —  how  would  India  meet  a 
crisis,  it  was  asked,  in  which  the  storm  center  of  the  panic 
was  London,  at  a  time  when  the  monsoon  should  fail  in 
two  consecutive  years  —  a  not  unprecedented  event  —  and 

1  The  famine  area  was  only  about  133,000  square  miles,  and  the  popula- 
tion directly  affected  was  about  49  millions.  East  India  Fin.  Stat.,  1908-09, 
P.  3- 


126  MODERN  CURRENCY  REFORMS 

when  the  resulting  famine  should  spread  over  the  entire 
country?  Such  questioning  led  to  a  pronounced  move- 
ment for  a  substantial  increase  in  the  Gold  Standard  Re- 
serve. The  Secretary  of  State  promptly  announced  a 
change  in  his  policy  with  reference  to  the  diverting  of 
part  of  the  seigniorage  profits  to  railway  expenditures. 
In  a  memorandum  relative  to  the  accounts  of  the  Govern- 
ment of  India  for  1909-10  and  estimates  for  the  two  fol- 
lowing years,  the  Under  Secretary  of  State  for  India  said : 

"  As  at  present  arranged  .  .  .  no  portion  of  the  [seigniorage] 
profit  will  be  used  for  railway  purposes  unless  the  sterling 
assets  of  the  Gold  Standard  Reserve  and  the  gold  held  in 
the  Paper  Currency  Reserve  amount  together  to  at  least 
£25  millions."1 

The  Finance  Member  of  the  Indian  Council  referred  in  his 
budget  speech  of  1910-11  to  the  lessons  of  the  crisis  of 
1907-09,  and  the  "  urgency  and  importance  of  building  up 
our  gold  resources  again  by  every  means  in  our  power."  2 
Large  Accumulation  of  Rupees  —  Coinage  Temporarily 
Discontinued.  The  heavy  withdrawals  of  gold  from  the 
reserves  in  1907  and  1908  had  their  counterpart  in  heavy 
receipts  of  rupees  by  the  Government.  Of  course  this 
meant  that  no  more  new  rupees  would  need  to  be  coined 
for  some  time,  and  therefore  that  the  Gold  Standard  Re- 
serve would  have  no  accretions  from  seigniorage  profits. 
In  November  1907  when  coinage  was  stopped  the  Govern- 
ment held  R.  280  millions  in  its  two  reserves,  and  by  Sep- 
tember 1908  this  figure  had  grown  to  approximately  R.  480 
millions.  After  that  date  there  was  a  steady  decline, 
the  rupees  being  paid  out  in  large  quantities  against  deposits 
of  gold  in  India  or  in  London.  By  May  1913  the  rupee 
holdings  had  been  reduced  to  R.  150  millions,  and  the 
Secretary  of  State  once  more  began  the  purchase  of  silver 

1  East  India  Fin.  Stat.,  1911-12,  pp.  9-10. 

2  East  India  Fin.  Stat.  and  Budget  for  1910-11,  p.  18. 


INDIAN  CURRENCY  SINCE  THE  CRISIS  OF   1907-1908     127 

for  rupee  coinage.1  For  the  two  following  years  the  coinage 
was  so  large  as  to  yield  the  Gold  Standard  Reserve  a 
seigniorage  profit  of  £5!  millions.  The  Gold  Standard 
Reserve  and  the  Paper  Currency  Reserve  together  in 
1914-15  contained  £26  millions  in  gold  coin  and  bullion 
and  £18.5  millions  in  sterling  securities.2 

Proper  Size  of  Gold  Standard  Reserve.  To  the  subject 
of  the  proper  size  of  the  Gold  Standard  Reserve,  the  Royal 
Commission  of  1913-14  gave  considerable  attention.  Its 
conclusion  was  that  the  Gold  Standard  Reserve  should  be 
the  first  reliance  for  the  support  of  exchange,  and  that  the 
gold  in  the  Paper  Currency  Reserve  should  be  resorted  to 
only  in  so  far  and  so  long  as  the  Gold  Standard  Reserve 
was  not  adequate  to  support  the  burden  itself.  The  Gold 
Standard  Reserve  had  not  yet,  in  the  opinion  of  the  Com- 
mission, reached  the  figure  where  it  could  safely  be  depended 
upon  as  a  first  line  of  defense,  and  the  Commission  concluded 
that  it  would  therefore  not  be  useful  for  them  to  try  to  lay 
down  any  hypothetical  limit  beyond  which  additions  to  the 
Gold  Standard  Reserve  should  cease.  They  believed  that 
£25  millions  was  insufficient,  and  recommended  that  the 
Government  for  the  present  should  continue  to  place  in 
the  Gold  Standard  Reserve  all  seigniorage  profits  from 
the  coinage  of  silver  and  any  interest  accruing  from  invest- 
ments or  loans  made  from  the  Reserve,  until  further  ex- 
perience should  permit  a  much  more  accurate  definition  of 
the  demands  which  the  Reserve  might  be  called  upon  to 
meet.3 

Location  of  Gold  Standard  Reserve.  The  crisis  of  1907-08 
greatly  altered  the  function  of  the  Gold  Standard  Reserve. 
The  Reserve  ceased  to  be  an  invested  surplus  or  "  secondary 
reserve"  to  be  used  only  for  the  purpose  of  maintaining  ex- 
change in  times  of  extreme  emergency  (with  a  small  portion 

1  East  India  Fin.  Stat.,  1913-14,  p.  15. 

2  Ibid.,  1914-15,  p.  29. 

8  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  sees.  86  and  89. 


128  MODERN  CURRENCY  REFORMS 

of  the  Reserve  in  India  to  be  used  for  meeting  emergency 
demands  for  silver  rupees),  and  quickly  became  an  active 
redemption  fund.  For  the  efficient  performance  of  this 
redemption  function  the  place  for  the  gold  part  of  the 
Reserve  was  clearly  London,  despite  the  opposition  of 
many  Indian  critics.  The  testimony  of  both  theory  and  ex- 
perience was  that  in  times  of  emergency  the  redemption  of 
rupees  in  gold  in  India  is  nothing  like  as  effective  in  restoring 
exchange  as  is  redemption  in  sterling  drafts,  i.e.  in  gold  laid 
down  in  London.1  This  was  the  experience  of  the  crisis  of 
1907-08  during  which  £4,179,000  in  gold  was  withdrawn  by 
the  public  from  the  Paper  Currency  Reserve  in  India,  ap- 
parently with  the  purpose  of  hoarding,  since  only  £250,000 
were  exported  during  that  period  on  private  account.2 
Since  the  crisis  of  1907-08  the  conviction  has  been  a  growing 
one  that  the  proper  place  for  the  reserve  which  is  to  be  used 
for  maintaining  exchange,  when  the  Secretary  of  State's 
operations  in  council  bills  fail  to  do  so,  is  London.  The 
sale  in  India  of  "reverse  council  bills"  and  of  cable  transfers 
on  the  Gold  Standard  Reserve  in  London,  when  exchange 
declines  to  India's  gold-export  point,  has  now  become  an 
established  practice  in  Indian  monetary  administration. 

Concerning  the  location  of  the  Reserve  the  Royal  Com- 
mission said  in  its  final  Report : 

"The  most  suitable  place  for  the  location  of  the  Gold 
Standard  Reserve  is,  in  our  opinion,  undoubtedly  London, 
and  in  this  view  the  majority  of  our  witnesses  concurred. 
London  is  the  clearing-house  of  the  world,  India's  chief 
customer  is  the  United  Kingdom,  and  London  is  the  place 
where  money  is  required  both  for  the  expenditure  of  the 
Secretary  of  State  on  India's  behalf  and  for  payment  of 
India's  commercial  obligations  to  this  country  and  the  world 
in  general.  If  the  Reserve  were  kept  in  India  it  would  have 
to  be  shipped  to  London  to  be  used.  This  would  involve 

1  Cf.  supra,  pp.  90—91,  and  infra,  pp.  141—142. 

2  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  sec.  62. 


INDIAN  CURRENCY  SINCE  THE  CRISIS  OF  1907-1908     129 

delay  at  a  moment  when  immediate  action  is  essential. 
The  objections  put  forward  to  keeping  it  in  London  rest  on 
the  belief  that  the  Reserve  is  regarded  in  London  as  being 
available  to  supplement  the  Bank  of  England's  reserve. 
There  is  no  foundation  at  all  for  this  belief.  We  have  no 
hesitation  therefore  in  recommending  that  the  whole  of  the 
Gold  Standard  Reserve  should  be  kept  in  London.  "  1 

With  a  qualification  in  favor  of  a  rupee  portion  of  the  Re- 
serve in  India,  we  can  readily  accept  this  judgment  of  the 
Royal  Commission.  It  sounds  like  the  words  of  Lindsay 
in  his  testimony  before  the  Fowler  Committee  in 


Composition  of  Gold  Standard  Reserve 

It  has  been  previously  mentioned  that  the  Fowler  Com- 
mittee, in  recommending  the  establishment  of  a  gold  reserve 
out  of  the  seigniorage  profits  realized  on  rupee  coinage, 
apparently  contemplated  the  accumulation  of  a  gold  coin 
redemption  fund  in  India,3  and  that  it  was  such  a  fund  that 
the  Indian  Government  apparently  had  in  mind  in  their 
recommendations  of  1900;  but  that  the  Secretary  of  State 
thwarted  this  purpose  by  interpreting  the  proposed  gold 
reserve  to  be  a  sort  of  invested  surplus  fund  to  be  held  in 
London  as  a  second  line  of  defense.  In  1907,  as  we  have 
seen,4  there  was  developed  a  branch  of  this  Reserve  in  the 
form  of  a  rupee  portion  (normally  6  crores)  held  in  India 
to  anticipate  sudden  demands  for  additional  rupee  coinage.5 
The  crisis  of  1907-08,  it  has  been  seen,6  compelled  the 
Government  to  call  upon  this  second  line  of  defense,  with 
the  result  that  between  July  31,  1907  and  August  31,  1908 

1  Ibid.,  sec.  90. 

2  Supra,  pp.  86-87. 

3  Supra,  pp.  104-105 

4  Supra,  pp.  107-108. 

6  The  figures  for  the  amount,  composition,  and  location  of  the  Gold 
Standard  Reserve  by  quarterly  periods  1901-13  are  tabulated  in  State- 
ment A,  Appendix  III  of  the  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  p  97. 

6  Supra,  pp.  118-120. 
K 


130  MODERN  CURRENCY  REFORMS 

the  nominal  value  of  the  securities  held  in  the  Reserve  de- 
clined from  £14.4  millions  to  £7.3  millions,  while  the  rupee 
portion  increased  from  R.  60  millions  to  R.  172.5  millions. 
After  the  crisis,  the  rupee  portion  of  the  Reserve  was 
gradually  reduced  against  payments  of  gold  into  the  Reserve 
either  in  England  or  India  (including  exchanges  with  other 
funds),  until  in  1911  it  amounted  to  slightly  less  than 
R.  30  millions.  In  1912  the  rupee  portion  was  again  in- 
creased, and  by  March  31,  1913  it  had  been  brought  back 
to  the  normal  figure  of  R.  60  millions.  Later,  on  the  recom- 
mendation of  the  Royal  Commission  on  Indian  Finance  and 
Currency,  the  rupee  portion  of  the  Gold  Standard  Reserve 
was  discontinued,  being  transferred  to  the  Paper  Currency 
Reserve  in  exchange  for  an  equivalent  in  gold.  The  reduc- 
tion of  the  rupee  portion  of  the  Reserve  after  the  crisis 
meant  the  reinvestment  of  most  of  the  Reserve  in  sterling 
securities,  and  we  find  that  the  securities  in  the  Reserve 
at  market  value  increased  from  £5.1  millions  December  31, 
1908  to  £15.9  millions  March  31,  1913.  As  a  result  of 
the  lessons  of  the  crisis,  however,  it  was  decided  to  put  out 
part  of  the  Reserve  in  short-time  loans  in  the  London 
money  market  to  a  selected  group  of  highly  responsible 
business  houses.  These  loans  were  made  for  the  Govern- 
ment by  the  Indian  Office  Broker,  who  received  a  commis- 
sion for  his  services  based  upon  the  interest  realized  on 
the  loans.  The  loans  were  secured  by  collateral,  es- 
pecially preferential  terms  being  given  to  Indian  govern- 
ment securities.  By  1909  the  amount  of  the  Indian  funds, 
of  which  the  funds  belonging  to  the  Gold  Standard  Reserve 
constituted  part,  to  be  lent  on  short  notice  in  the  London 
market  had  grown  to  such  a  large  figure  that  it  appeared 
impossible  to  lend  it  all  out  on  the  specified  terms  to  indi- 
vidual concerns ;  and  the  practice  was  accordingly  insti- 
tuted of  placing  it  out  on  deposit  at  interest  in  certain  of 
the  large  joint  stock  banks.  At  first  four  banks  were 
selected,  but  later  the  number  was  increased  to  seven. 


INDIAN  CURRENCY  SINCE  THE  CRISIS  OF   1907-1908     131 

The  broker  was  supposed  to  apportion  these  funds  as  nearly 
equally  as  practicable,  consistently  with  securing  the  most 
favorable  interest  rates  for  the  Indian  Government.  Sub- 
stantial sums  were  deposited  in  banks  of  which  the  Chair- 
man of  the  Finance  Committee  of  the  Indian  Council  and 
two  other  members  were  directors,  and  this  led  to  much  criti- 
cism of  favoritism.1  No  dishonesty  has  been  proven  and 
the  evidence  seems  to  show  that  in  these  dealings  the  mem- 
bers of  the  Finance  Committee  did  not  show  favoritism 
toward  their  own  banks.  None  the  less  the  practice  is  one 
that  would  naturally  provoke  criticism,  and  "  Caesar's 
wife  should  be  above  suspicion." 

Beginning  in  December  1912,  the  policy  was  inaugurated 
of  keeping  part  of  the  Gold  Standard  Reserve  in  the  form 
of  gold  earmarked  at  the  Bank  of  England.  As  the  idea 
became  accepted  of  using  the  Gold  Standard  Reserve 
largely  as  a  redemption  fund  instead  of  merely  as  an  in- 
vested surplus  to  be  utilized  only  in  case  of  great  emergency, 
the  conviction  became  more  and  more  general  that  a  sub- 
stantial part  of  the  Reserve  should  be  in  gold  available  on 
demand.  A  time  of  threatened  panic  is  not  a  favorable 
time  in  which  to  sell  securities  for  gold.  In  1912  there- 
fore the  Secretary  of  State  began  to  accumulate  a  por- 
tion of  the  Reserve  in  gold  earmarked  at  the  Bank  of  Eng- 
land, expressing  his  intention  to  accumulate  a  gold  fund  of 
£5  millions.2  This  accumulation  in  the  Reserve  of  a  sub- 
stantial sum  of  earmarked  gold  was  supported  by  public 
opinion  in  India.3  It  was  also  strongly  supported  in  the 
testimony  before  the  Royal  Commission  of  Mr.  Alfred 
Clayton  Cole,  Governor  of  the  Bank  of  England,  who 
favored  raising  the  sum  of  earmarked  gold  to  £10  or  £11 


1  Cf.  S.  V.  Doraiswami,  Indian  Finance,  Currency  and  Banking,  pp.  34- 
36;  also  Memorandum  of  M.  de  P.  Webb,  in  Rep.  Roy.  Com.  Ind.  Fin.  & 
Cur.,  App.  XXI,  pp.  550-554. 

2  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  App.  V,  p.  201. 

8  Cf.  East  India  Fin.  Stat.  and  Budget,  1913-14,  p.  16. 


132  MODERN  CURRENCY  REFORMS 

millions  as  a  precaution  against  emergency  demands.1 
In  answer  to  the  criticism  that  such  gold  would  be  absorbed 
by  the  London  money  market,  leaving  India  in  the  lurch 
in  time  of  crisis,  Mr.  Cole  said  that  Indian  gold  in  the  Bank 
of  England  never  appeared  in  the  Bank  of  England's  pub- 
lished account,  and  that  it  was  quite  incorrect  to  say  that  the 
London  money  market  took  that  gold  into  account  at  all. 
The  following  quotation  from  the  testimony  is  apposite : 
" Chairman,  'Your  argument  I  think  is,  as  I  put  it  just 
now,  that  in  a  time  of  crisis  you  do  not  claim  that  India 
should  support  the  London  market,  but  that  it  should  not 
be  an  additional  drain  upon  it,  and  should  carry  its  own 
burden?'  —  Mr.  Cole,  'It  should  carry  its  own  burden.'  "  2 
The  Royal  Commission  in  its  final  Report  took  the  same 
position,  saying: 

"We  are  clearly  of  opinion  that  the  actual  holding  of 
gold  in  this  Reserve  has  been  and  is  insufficient,  and  that 
it  is  important  to  take  immediate  steps  for  its  increase.  In 
our  opinion,  the  best  rule  in  present  circumstances  would 
be  that  not  less  than  one  half  of  the  fund  should  be  held  in 
actual  gold  when  the  total  fund  exceeds  £30,000,000,  and 
that  a  minimum  amount  £15,000,000  should  be  accumu- 
lated as  rapidly  as  possible."  3 

The  logic  of  the  situation  strongly  supports  this  recom- 
mendation. 

One  step  in  the  direction  of  the  accomplishment  of  the 
end  recommended  by  the  Royal  Commission  was  the  one 
previously  mentioned,4  namely,  the  discontinuance  of  the 
rupee  portion  of  the  Gold  Standard  Reserve  and  the  further 
transference  to  the  Paper  Currency  Reserve  of  £4  millions 
in  securities  in  exchange  for  the  equivalent  in  gold  —  trans- 
actions which  would  have  raised  the  amount  of  gold  in  the 
Gold  Standard  Reserve  to  nearly  £10  millions. 

1  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  Evidence,  Qs.  3406-09. 

2  Ibid.,  Q.  3416. 

3  Ibid.,  sees.  95-96. 

4  Supra,  p.  129. 


INDIAN  CURRENCY  SINCE  THE   CRISIS  OF   1907-1908     133 

In  the  judgment  of  the  writer,  the  rupee  portion  of  the 
Gold  Standard  Reserve  should  have  been  continued,  not, 
however,  at  the  expense  of  the  gold  portion  of  the  Reserve, 
but  of  the  invested  portion.  The  proper  function  of  a  gold 
standard  reserve  is  to  maintain  the  parity  of  the  fiduciary 
silver  coins  with  gold,  and  the  proper  function  of  a  paper 
currency  reserve  is  to  maintain  the  parity  of  the  currency 
notes  with  the  chief  coins  of  circulation  —  in  this  instance, 
with  silver  rupees.  The  maintenance  of  the  parity  is  a 
two-sided  operation.  It  involves  not  only  the  prevention 
of  depreciation,  by  redemption  and  withdrawal  from  circula- 
tion of  fiduciary  coins  when  they  become  relatively  redun- 
dant ;  but  also  the  prevention  of  appreciation,  by  putting 
into  circulation  fiduciary  coins  in  exchange  for  gold  when 
such  coins  become  relatively  scarce.  These  two  functions 
properly  belong  to  the  same  fund  —  a  fund  which  would  be 
constant  (except  for  accruing  profits  and  increasing  circu- 
lation of  fiduciary  coins),  inasmuch  as  gold  would  never 
be  paid  out  of  it  in  London  or  in  India  except  as  the 
equivalent  in  rupees  was  paid  in,  and  rupees  would  never 
be  paid  out  in  India  except  as  the  equivalent  in  gold  was 
paid  in  either  in  London  or  in  India.  The  Paper  Currency 
Reserve,  on  the  other  hand,  has  performed  its  proper 
function  when  it  has  provided  for  interconvertibility  ori 
demand  in  convenient  places  in  India  of  rupees  and  rupee 
notes. 

Of  course  it  is  perfectly  proper,  in  order  to  distribute  the 
funds  most  effectively  in  the  various  reserves  and  in  the 
Secretary  of  State's  balances  among  the  places  and  in  the 
forms  most  needed,  to  arrange  for  the  swapping  of  debits 
and  credits  among  the  various  funds.  Aside  from  this, 
however,  the  different  funds  should  be  distinctly  sepa- 
rate in  location  and  function,  and  only  in  very  great 
emergencies  should  one  reserve  be  called  upon  to  support 
another  reserve  or  to  perform  the  legitimate  function  of 
another. 


134  MODERN  CURRENCY  REFORMS 


Convertibility 

The  movement  favoring  the  increase  in  the  size  of  the 
Gold  Standard  Reserve,  and  the  change  in  its  form  so  as  to 
make  it  more  promptly  available  when  needed,  was  natu- 
rally accompanied  by  a  demand  for  greater  certainty  that 
the  rupees  could  be  converted  into  gold  or  gold  exchange 
on  demand  and  in  unlimited  quantities.  We  have  already 
noted  the  failure  of  the  Indian  Government  to  meet  this 
need  in  the  crisis  of  1907-08,  and  the  unfortunate  conse- 
quences of  this  failure,  in  diminishing  the  public's  con- 
fidence in  the  Indian  currency.1  That  lack  of  public  con- 
fidence in  the  rupee  persists  to  this  day.  "Experience 
proves,"  said  M.  F.  Reed,  a  business  man  with  25  years' 
experience  in  India,  in  a  memorandum  submitted  to  the 
Royal  Commission,  "that  the  existing  methods  have  not 
gained  the  public  confidence  in  their  [i.e.  the  Govern- 
ment's] ability  and  willingness  to  combat  a  crisis."  2  Such 
also  is  the  testimony  of  many  others.3  The  Royal  Com- 
mission unfortunately  was  not  willing  to  recommend 
making  the  redemption  of  rupees  on  demand  in  gold 
exchange  a  statutory  requirement.  It  said:  "We  have 
considered  whether  it  would  be  desirable  to  make  the 
Gold  Standard  Reserve  the  subject  of  statutory  regula- 
tions. But  there  are  disadvantages  in  restricting  the  free- 
dom of  Government  in  a  crisis,  and  it  is  undesirable  that 
the  disposition  and  amount  of  the  Reserve  should  be 
stereotyped  until  further  experience  makes  it  possible  to 
forecast  with  greater  certainty  the  nature  and  the  extent 
of  the  calls  which  may  be  made  upon  it.  We  therefore 
do  not  recommend  that  the  Gold  Standard  Reserve  should 

1  Cf.  supra,  pp.  116-118  and  120-121. 

2  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  App.  XXII,  p.  573. 

8  Cf.  Doraiswami,  op.  tit.,  pp.  37-38;  also  testimony  of  Stanley  Reed, 
Editor  of  the  Times  of  India,  in  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  Evi- 
dence, Q.  9970. 


INDIAN  CURRENCY  SINCE  THE  CRISIS  OF   1907-1908     135 

be  regulated  by  statute."  1  It  seems  strange  that  a  great 
country  like  India,  with  gold  and  invested  sterling  reserves 
of  over  £40  millions,  with  excellent  borrowing  credit,  with 
the  support  of  England,  and  after  an  experience  with  the 
gold  standard  of  fifteen  years,  is  so  afraid  to  assume  the 
responsibility  of  a  statutory  commitment  to  redeem  its 
fiduciary  coins  in  gold  on  demand.  Certainly  the  Indian 
business  community  is  justified  in  wanting  the  Govern- 
ment to  assume  this  responsibility. 

The  Royal  Commission,  however,  did  go  so  far  as  to 
say  that  the  crisis  of  1907-08  had  taught  the  Government 
the  desirability  of  formulating  in  advance  and  giving  pub- 
licity to  the  policy  which  it  intended  to  pursue  in  a  crisis. 
The  Commission  further  declared  that  the  cardinal  feature 
of  the  whole  system  was  "absolute  security  for  the  converti- 
bility into  sterling  of  so  much  of  the  internal  currency  as 
may  at  any  moment  be  required  for  the  settlement  of  India's 
external  obligations";2  it  also  said  that  "it  is  almost  as 
important  that  the  general  public  should  have  confidence 
in  the  determination  of  the  Government  effectively  to  use 
their  resources  to  maintain  the  rupee  at  15.  4^.,  as  it  is  that 
the  Government  should  have  the  necessary  resources  for 
so  doing."  3  The  Commission  went  so  far  as  to  advise  that 
the  Government  should  make  a  public  notification  of  their 
intention  to  sell  bills  in  India  on  London  at  the  rate  of  i6d., 
whenever  they  were  asked  to  do  so,  "  to  the  full  extent  of  their 
resources."  4 

The  Paper  Currency  and  the  Paper  Currency  Reserve  since 
the  Crisis  of  1907-08 

Since  the  crisis  of  1907-08,  there  has  been  a  large  increase 
in  the  paper  currency  circulation,  that  circulation  rising 

1  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  sec.  101. 

2  Ibid.,  sec.  76. 

3  Ibid.,  sec.  52. 

4  Ibid.,  sec.  101.     Italics  are  mine. 


136  MODERN  CURRENCY  REFORMS 

from  R.  469  millions  on  March  31,  1908  to  R.  690  millions 
on  M  arch  31,1913.  Paper  money  has  been  growing  rapidly 
in  popularity  in  India.  Probably  the  chief  single  factor 
in  this  increasing  popularity  has  been  the  "  universaliza- 
tion"  of  the  notes  of  denominations  of  R.  100  and  under,1 
so  that  these  notes  are  now  a  legal  tender  throughout  British 
India  and  are  encashable  at  treasury  offices  in  different 
parts  of  the  country.  The  larger  denominations  are  still 
limited  to  their  respective  "  circles."  2  In  order  further  to 
popularize  the  notes,  the  Royal  Commission  recommended 
that  notes  of  the  denomination  of  JR..  500  should  at  once  be 
universalized.3  At  the  end  of  the  fiscal  year  1902-03,  before 
any  of  the  notes  were  universalized,  the  percentage  of  the 
gross  note  circulation  represented  by  notes  of  denomina- 
tions of  R.  100  and  less  was  49,  while  at  the  end  of  the  fiscal 
year  1911-12,  after  all  notes  in  denominations  not  exceeding 
R.  100  (except  the  R.  20  note  which  was  being  withdrawn) 
had  been  universalized,  the  percentage  of  the  gross  circula- 
tion represented  by  notes  of  R.  100  or  less  had  increased 

to  57-4 

The  fiduciary  part  of  the  Paper  Currency  Reserve,  we 
have  seen,6  was  increased  from  R.  100  millions  to  R.  120 
millions  in  1905-06,  the  additional  R.  20  millions  being 
invested  in  British  securities  and  held  in  England.  In 
1913  authority  was  given  for  a  further  increase  of  R.  20 

1  As  previously  noted,  in  1905  the  s-rupee  note  issued  from  any  town 
not  in  Burma  was  made  legal  tender  throughout  British  India,  except 
in  Burma,  and  encashable  at  any  office  of  issue  not  in  Burma.     In  1909 
the  exception  of  Burma  was  removed  and  the  5-rupee  note  was  made 
"universal."     Under  authority  of  Act  II,  1910,  the  notes  of  10,  50,  and  100 
rupees  have  since  been  universalized,  and  the  issuance  of  the  2o-rupee  note 
has  been  discontinued.     Cf.  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  App.  VIII, 
p.  240. 

2  Cf.  supra,  pp.  8-9. 

8  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  sec.  115. 

4  Computations  based  on  figures  given  in  Rep.  Roy.  Com.  Ind.  Fin.  & 
Cur.,  App.  VIII,  pp.  240  and  248-249. 
6  Cf .  supra,  p.  100. 


INDIAN  CURRENCY  SINCE  THE   CRISIS  OF   1907-1908     137 

millions  in  the  fiduciary  portion  of  the  Reserve,  authority 
likewise  being  given  and  utilized  to  invest  these  R.  20 
millions  in  sterling  securities  and  keep  them  in  England. 
After  the  crisis  of  1907-08  the  percentage  of  gold  in  the  Re- 
serve continually  increased  until  in  1913  it  amounted  in 
round  numbers  to  56  per  cent  of  the  total  Reserve,  24  per 
cent  being  silver  and  20  per  cent  being  securities.  Ap- 
proximately one  fourth  of  the  gold  was  held  in  England 
at  the  end  of  the  year  1912-13  and  three  fourths  (about  £20 
millions)  in  India.  Despite  the  efforts  of  the  Government 
through  the  sale  of  council  drafts  in  London  to  prevent  the 
undue  accumulation  of  gold  in  the  Paper  Currency  Reserve 
in  India,  the  amount  there  accumulated  increased  out  of 
all  proportion  to  needs,  and,  inasmuch  as  the  gold  when 
needed  is  usually  needed  mostly  in  London  either  for  the 
purchase  of  silver  or  securities  or  for  the  redemption  of 
drafts,  it  had  to  be  transferred  to  London  often  at  the 
Government's  expense.  The  Royal  Commission  made  the 
recommendation  previously  mentioned 1  that  the  R.  60 
millions  in  the  Gold  Standard  Reserve  in  India  should  be 
transferred  to  the  Paper  Currency  Reserve  in  exchange  for 
£4  millions  in  sovereigns  to  be  transferred  from  the  Paper 
Currency  Reserve  to  the  Gold  Standard  Reserve  in  London. 
The  Commission  further  recommended  that  the  fiduciary 
portion  of  the  Paper  Currency  Reserve  should  be  increased 
at  once  from  R.  140  millions  to  R.  200  millions,  but  that,  in- 
stead of  fixing  this  figure  as  a  maximum,  the  maximum  of 
the  fiduciary  portion  should  be  fixed  at  the  amount  of  the 
notes  held  by  the  Government  in  the  reserve  treasuries, 
and  therefore  not  likely  to  be  presented  for  redemption, 
plus  one  third  of  the  net  circulation  for  the  time  being.2 
The  Commission  also  recommended  (i)  that  this  readjust- 
ment should  be  accomplished  by  the  transfer  of  sterling 
securities  to  the  amount  of  £4  millions  from  the  Gold 

1  Supra,  p.  132. 

2  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  sec.  112. 


138  MODERN   CURRENCY  REFORMS 

Standard  Reserve  to  the  Paper  Currency  Reserve  in  ex- 
change for  the  equivalent  in  gold  coin,  thereby  further 
increasing  the  proportion  of  gold  in  the  former  Reserve 
and  decreasing  it  in  the  latter ;  and  (2)  in  order  to  main- 
tain the  proper  proportions,  the  Commission  recommended 
that  the  Government  "  should  have  power  not  only  to 
make  such  further  permanent  investments  as  they  think 
fit  but  also  to  make  temporary  investments  or  to  grant 
loans  either  in  India  [to  the  Presidency  Banks]  or  in 
London."  *  Among  other  advantages  claimed  for  this  plan 
were  that  it  would  keep  the  Reserve  profitably  invested 
and  would  provide  additional  funds  for  the  Indian  money 
market  in  the  busy  season. 

Gold  Circulation  and  Proposals  for  Coining  Gold  in  India 

The  third  and  last  topic  to  be  considered  for  the  period 
from  the  crisis  of  1907-08  to  the  outbreak  of  the  European 
War  is  that  of  the  circulation  of  gold  coin  in  India  and  the 
coinage  of  gold  at  the  Indian  mints. 

It  has  previously  been  noted  that  the  Fowler  Committee 
contemplated  an  increasing  use  of  gold  coin  in  India's 
circulation.  To  that  end  the  sovereign  was  made  un- 
limited legal  tender,  and  steps  were  taken  for  coining  gold 
in  India.  The  Government  early  began  paying  out  gold 
from  post  offices  and  other  government  offices,  and  in  other 
ways  endeavored  to  encourage  its  circulation.2  These 
efforts,  however,  were  not  very  successful.  In  some  sec- 
tions of  India  there  was  a  moderate  circulation  of  gold  (e.g., 
parts  of  Bombay  and  the  Punjab),  but  throughout  the 
greater  part  of  the  country  the  circulation  was  almost 
negligible.  Most  of  India's  heavy  imports  of  gold  from 
Australia  and  South  Africa  appear  to  have  found  their 
way  either  into  the  reserves  or  into  ornaments  and  hoards. 
Reports  have  been  common  in  recent  years  of  an  increas- 

1  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  sec.  113.          2  Cf.  supra,  p.  93. 


INDIAN  CURRENCY  SINCE  THE  CRISIS  OF   1907-1908     139 

ing  tendency  to  hoard  gold  in  place  of  silver.  The  blow 
to  confidence  in  the  rupee  currency  given  by  the  crisis  of 
1907-08  strengthened  this  tendency. 

After  that  crisis  there  was  much  agitation  in  favor  of 
increasing  the  gold  circulation  of  India,  such  a  policy  being 
strongly  favored  by  the  Indian  people  and  by  many  high 
government  officials.  Space  will  permit  only  a  brief  con- 
sideration of  the  chief  points  in  the  controversy. 

Arguments  in  Favor  of  a  Large  Circulation  of  Gold  in 
India.  The  strongest  arguments  advanced  in  favor  of  a 
large  circulation  of  gold  coin  in  India  are : 

(1)  That  there  are  important  monetary  needs  in  India 
for  which  gold  coin  alone  is  suitable.     Checks  are  little 
used.     The  masses  of  the  people  distrust  the  banks  —  often 
with  reason,  for  there  have  been  in  recent  years  a  number  of 
bank  failures  which  have  brought  disaster  to  the  poorer 
classes.1    Paper  money  cannot  be  hoarded  without  risk  of 
rotting  or  of  being  destroyed  by  rats  and  insects.     Rupees 
are  too  bulky  for  large  hoards  or  for  large  transfers.2 

(2)  It  is  argued  that  the  Indian  people  lack  confidence 
in  the  stability  of  the  rupee,  as   shown  by  the  increas- 
ing   tendency    to    hoard    gold,    and    that    a    substantial 


1  Cf.  East  India  Fin.  Stat.  and  Budget,  1914-15,  pp.  20-30. 

2  The  following  passage  is  from  the  testimony  of  Stanley  Reed,  Editor 
of  the  Times  of  India,  before  the  Royal  Commission  on  Indian  Finance 
and  Currency  (Q.  9993) :  "If  you  follow  the  course  of  money  from  the  bank 
to  the  ryot's  house,  you  must  see  how  absolutely  essential  it  is  for  him,  both 
now  and  for  a  generation  hence,  to  be  largely  dependent  upon  a  metallic 
currency.    If  a  man  took  notes  from  a  cotton  centre  .  .  .  and  went  to  his 
village  25  or  30  miles  away,  they  would  be  waste  paper  for  him  to  a  large 
extent.     He  would  have  nowhere  to  put  them.     If  you  go  into  a  ryot's 
house  you  will  see  that  he  has  got  no  strong  box.     If  he  has  a  chest  of  any 
sort,  it  is  so  flimsy  that  it  is  an  invitation  to  the  robber.     If  he  puts  his  notes 
in  his  roof  they  are  quite  likely  to  be  eaten  by  rats,  because  in  an  Indian 
household  the  rat  lives  in  large  numbers  in  intimate  relation  with  the  family. 
If  he  buries  them  in  the  ground,  they  might  be  destroyed  by  the  monsoon 
or  eaten  by  white  ants  or  anything  else.     For  that  reason  he  must  have 
metallic  currency  of  some  sort  or  other,  because  in  nine  cases  out  of  ten  he 
buries  it  in  the  ground." 


140  MODERN  CURRENCY  REFORMS 

circulation  of  gold  is  requisite  to  inspire  confidence  in 
the  currency.1 

(3)  A  third  reason  is  the  fear  that  if  redemption  in  drafts 
on  London  is  the  chief  dependence  for  the  maintenance 
of  the  parity  of  the  rupee,  the  gold  reserves  maintained 
in  London  will  be  exploited  for  the  benefit  of  the  London 
money  market,  or  at  best  for  that  of  the  British  Govern- 
ment, in  time  of  emergency,  to  the  neglect  of  India's  prior 
needs.     With  the  gold  reserves  in  India,  it  is  claimed  that 
the  gold  would  be  more  effectively  under  the  control  of 
Indian  interests. 

(4)  There  is  a  strong  public  sentiment  in  India  for  gold 
in  circulation,  and,  whether  grounded  upon  adequate  rea- 
sons or  not,  it  exists,  and  if  the  people  want  gold  and  are 
willing  to  pay  for  it  they  should  have  it.     Sir  Guy  D.  A. 
Fleetwood  Wilson,  Finance  Member  of  the  Indian  Council 
from  1908  to  1913,  testified  that  while  in  India  he  had  tried 
to  get  into  touch  with  Indian  opinion  and  that  the  im- 
pression he  received  was  "that  there  is  an  almost  national 
desire  to  have  an  Indian  gold  coin.     They  are  very  tena- 
cious and  very  touchy  about  the  differentiation  between 
India  and  the  colonies,  and  I  think  that  is  a  little  grievance 
in  India,  and  if  you  can  remove  this  sentimental  grievance, 
it  will  be  a  very  advantageous  thing  to  do  so."  2 

This  sentiment  in  favor  of  gold,  it  is  claimed,  is  shown  by 
an  increasing  popularity  of  the  sovereign  since  1909  in  the 
circulation  of  certain  provinces  and  districts,  such  as  parts 
of  Bombay  Presidency,  and  of  the  United  Provinces,  the 
Punjab,  and  Cochin  in  the  Madras  Presidency.3  The 
Financial  Member  of  the  Viceroy's  Council  in  his  budget 
speech  of  1913-14  said:  "Out  of  the  total  additions  to 


1  Cf.  J.  Shields  Nicholson  in  Economic  Journal,  XXIV,  1914,  pp.  238-239 ; 
also  note  by  Sir  James  Begbie,  in  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  p.  88, 
sec.  5. 

2  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  Evidence,  Q.  11,425. 
8  Ibid.,  sec.  54. 


INDIAN  CURRENCY  SINCE  THE  CRISIS  OF   1907-1908     141 

the  currency  in  the  three  years  ending  March  1912  amount- 
ing to  65  crores,  rupees  accounted  for  only  28  crores.  The 
habits  of  the  people  in  fact  are  changing.  The  last  currency 
report  of  the  Comptroller  General  shows  clearly  that  gold 
has  to  an  increasing  extent  established  itself  in  ordinary 
circulation.  .  .  ."  1 

Arguments  against  a  Large  Circulation  of  Gold  in  India. 
The  reasons  for  not  encouraging  the  circulation  of  gold 
in  India  were  forcibly  stated  by  Professor  J.  M.  Keynes 
in  his  excellent  book  on  Indian  Currency  and  Finance,  pub- 
lished in  1913,  of  which  chapter  4  deals  with  The  Present 
Position  of  Gold  in  India  and  Proposals  for  a  Gold  Cur- 
rency. The  position  there  taken  by  Keynes  was  later  fol- 
lowed in  its  essentials  by  the  Royal  Commission  on  Indian 
Finance  and  Currency,  of  which  he  became  a  member.  The 
chief  reasons  for  not  encouraging  the  circulation  of  gold  in 
India  are : 

(1)  That  the  proper  place  for  gold  if  it  is  to  be  available 
for  emergencies  is  in  government  reserves  or  bank  reserves, 
not  in  the  pockets  of  the  people.     In  time  of  crisis  gold 
is  chiefly  needed  for  exportation  and  it  is  needed  promptly 
and  in  large  quantities.     To  meet  such  a  need  it  cannot 
be  collected  from  the  public  —  in  fact,  in  time  of  crisis 
the  people  are  likely  to  hold  it  with  a  firmer  grip  than 
usual. 

(2)  Not  only  would  gold  in  circulation  be  of  little  avail 
for  meeting  emergency  demands,  but  it  would  be  an  actual 
obstacle  to  the  making  of  adequate  preparations  for  meeting 
such  demands,  and  might  even  increase  the  burden  placed 
upon  the  country's  reserves.     Experience  shows  that  in 
those  districts  of  India  where  gold  in  circulation  is  most 
popular  the  Government's  currency  notes  are  least  popular ; 
in  fact  there  is  evidence  that,  in  some  districts  at  least, 
the  popularity  of  the  notes  declines  as  that  of  gold  coins 
increases.     It  is  very  natural  that  the  sovereign,  being 

1  East  India  Fin.  Stat.,  1913-14,  P-  17- 


142  MODERN  CURRENCY  REFORMS 

a  coin  of  a  moderately  large  denomination  for  India,  should 
take  the  place  of  the  notes.  But  for  the  public  to  present 
notes  to  the  redemption  offices  and  take  gold  coins  for 
circulation  from  the  Paper  Currency  Reserve  is  to  weaken 
the  Reserve,  since  only  part  of  the  Reserve  would  be  kept 
in  gold,  a  large  part  being  kept  in  the  form  of  interest- 
bearing  securities.  Securities  would  need  to  be  sold  to 
restore  the  proper  proportion  of  gold  and  the  income  of  the 
Reserve  would  be  curtailed. 

To  a  lesser  degree  the  gold  coins  would  take  the  place  of 
silver  rupees.  This  would  lessen  the  seigniorage  profits 
available  for  building  up  the  Gold  Standard  Reserve,  but 
since  "it  is  the  fiduciary  coins  with  which  the  public  are 
most  eager  to  part"  in  time  of  emergency,  "the  infusion  of 
more  gold  into  the  circulation  would  .  .  .  not  correspond- 
ingly reduce  the  amount  of  ...  reserves  which  Govern- 
ment ought  in  prudence  to  keep."  1 

(3)  Gold  is  too  expensive  a  material  to  be  used  as  a 
circulating  medium  in  a  comparatively  poor  country  like 
India,  which  effects  its  exchanges  so  largely  by  means  of 
money  instead  of  by  checks  and  other  money  substitutes. 
For  India  a  large  amount  of  gold  in  circulation  would  be  an 
expensive  luxury.     The  country,  moreover,  already  wastes 
large  resources  in  the  needless  hoarding  of  the  precious 
metals,  and  the  Government  ought  not  to  encourage  in 
the  slightest  degree  this  ingrained  fondness  for  handling 
gold.     On  the   other  hand,   the   Government  should  do 
everything    reasonable   to    encourage    the   use    of   notes, 
checks,  and  other  inexpensive  exchange  media. 

(4)  India  is  a  country  in  which  the  demand  for  currency 
is  highly  seasonal,  and  India  like  the  United  States  demands 
a  high  degree  of  currency  elasticity.     It  is  through  the  de- 
velopment of  the  use  of  notes  (particularly  bank-notes),  and 
checks,  not  of  gold  coin,  that  adequate  seasonal  elasticity 
can  best  be  secured.2 

1  Keynes,  p.  91.  2  Ibid.,  pp.  96-97. 


INDIAN  CURRENCY  SINCE  THE  CRISIS  OF   1907-1908     143 

Coinage  of  Gold  in  India.  A  part  of  the  controversy  over 
the  use  of  gold  coin  in  India  related  to  the  coinage  of  gold 
at  the  Indian  mints.  It  has  previously  been  noted  that 
steps  were  taken  in  1900  and  1901  in  the  direction  of  pro- 
viding for  the  coinage  of  gold  in  India.1  The  movement 
thus  begun  was  brought  to  a  halt  apparently  because  of 
the  opposition  of  the  Home  Government ;  and,  despite  a 
strongly  favorable  sentiment  in  India,  repeated  efforts  by 
the  Indian  Government,  and  a  voluminous  correspondence 
between  that  Government  and  the  British  Treasury,2  no 
branch  of  the  Royal  Mint  has  yet  been  established  in  India 
for  the  coinage  of  gold,  nor  have  the  Indian  mints  been 
authorized  to  coin  gold.  Apparently  the  British  Treasury 
early  made  up  its  mind  that  the  coinage  of  gold  in  India  was 
undesirable,  and  undertook  to  wear  out  the  patience  of  the 
Indian  Government  by  raising  all  sorts  of  petty  objections. 

While  the  argument  in  favor  of  coining  gold  in  India  de- 
pends for  its  validity  largely  upon  a  favorable  judgment  as 
to  the  desirability  of  encouraging  the  wide  circulation  of 
gold  coins  in  India,  not  all  who  favor  the  wide  circulation 
of  gold  favor  also  the  coinage  of  gold  at  the  Indian  mints. 
Some,  believing  that  the  sovereign  is  the  gold  coin  best 
adapted  for  India's  use,  think  that  this  coin  for  circulation 
in  India  can  most  cheaply  and  effectively  be  coined  at  the 
existing  mints  in  India  and  perhaps  also  in  Australia.  In 
the  discussions  of  this  subject  much  has  been  made  of  the 
fact  that  India  is  herself  a  producer  of  considerable  quan- 
tities of  gold,3  and  that  it  involves  a  needless  expense  to  be 
compelled  to  ship  this  gold  to  London  to  have  it  coined, 
and  then  to  bring  it  back  to  India.  Another  argument  of 

1  Supra,  pp.  109—111. 

2  Cf.  correspondence  on  subject.    East  India  (Mint  for  Gold  Coinage),  Cd. 
6619,  No.  495  of  1913. 

3  The  annual  gold  production  of  British  India  and  the  Native  States 
varied  between  1904  and  1913  from  a  minimum  of  £2,135,000  (1907)  to  a 
maximum  of  £2,418,000  (1905).    Stat.  Abs.  rel.  Brit.  India,  48th  number 
(1915),  pp.  266-267. 


144  MODERN  CURRENCY  REFORMS 

weight  is  the  desirability  of  catering  to  Indian  public  sen- 
timent, which  is  highly  favorable  to  India's  having  her  own 
mint  for  the  coinage  of  gold.1 

Those  favoring  the  coinage  of  gold  in  India  are  not  unani- 
mous as  regards  the  coin  that  should  be  minted.  Some 
favor  a  sovereign  identical  with  the  British  sovereign  that 
could  be  shipped  back  and  forth  and  would  circulate  both 
in  India  and  Great  Britain.  Such  a  sovereign  has  been 
dubbed  "the  cement  of  the  Empire."2  This  proposal 
raises  some  problems  of  control.  The  Royal  Mint  would 
naturally  wish  to  control  rather  rigidly  the  minting  of  such 
a  coin,  while  India  is  proud  of  the  excellent  work  done  by 
her  mints  and  does  not  want  English  interference.  Over 
the  control  of  their  mints  the  Indian  people  are  very  jealous.3 

Another  proposal  is  to  coin  a  sovereign  analogous  to 
that  of  Australia.4  It  would  be  identical  with  the  British 
sovereign,  except  that  it  would  have  the  word  " India" 
stamped  upon  it.  Such  a  coin  would  not  circulate  freely 
outside  of  India,  but  unless  carefully  controlled  might 
cause  difficulty  if  it  worked  its  way  into  the  home  circula- 
tion. 

The  third  plan  was  for  a  gold  lo-rupee  piece  which 
would  be  a  distinctive  Indian  coin.  It  would  be  a  new 
coin,  however,  not  exportable  except  as  bullion,  and  would 
tend  to  divorce  still  further  the  Indian  currency  system  from 
that  of  the  home  country. 

The  Royal  Commission  in  its  final  Report,  after  conclud- 
ing that  "it  would  not  be  to  India's  advantage  to  encourage 
an  increased  use  of  gold  in  the  internal  circulation,"  5  took 
the  position  that  the  minting  of  gold  coin  in  India  was  un- 
desirable. It  did  not  believe  that  the  minting  of  gold  in 


1  Cf.  East  India  Fin.  Stat.,  1913-14,  P-  *7- 

2  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  Evidence,  Q.  11,425. 

3  Ibid.,  Qs.  11,426-11,430. 

4  The  Australian  sovereign  has  "Australia"  stamped  across  it. 
6  Rep.  Roy.  Com.  Ind.  Fin.  &  Cur.,  sec.  68. 


INDIAN  CURRENCY  SINCE  THE  CRISIS  OF   1907-1908     145 

India  was  needed  to  strengthen  confidence  in  the  Indian 
Currency  system,  because  it  declared  that  the  growth  of  a 
strong  Gold  Standard  Reserve  and  the  whole  trend  of  policy 
since  the  crisis  of  1907-08  left  no  doubt  as  to  the  determi- 
nation of  the  Government  to  maintain  exchange.  The 
Commission  said  that 

"the  mere  existence  of  a  mint  for  the  coinage  of  gold  could 
not  add  to  the  amount  of  gold  available  for  currency  pur- 
poses, and  the  idea  that  such  a  unit  would  give  an  '  auto- 
matic '  currency,  in  any  sense  which  is  not  true  of  the  existing 
power  to  import  sovereigns  at  will,  appears  to  us  to  be 
wholly  without  foundation."  1 

Nor  did  the  Commission  believe  it  likely  that  "the  facilities 
for  converting  gold  bullion  into  coin  which  such  a  mint 
would  provide  would  have  any  appreciable  effect  on  the 
amount  of  gold  withdrawn  from  circulation  or  would  en- 
courage gold  to  come  out  of  hoards  in  unfavorable  seasons."2 
In  any  event,  it  maintained,  the  public  would  secure  equal 
advantages  if  the  Government  of  India  would  renew  the 
Notification,  withdrawn  in  1906,  of  its  readiness  to  accept 
gold  at  the  Bombay  Mint  in  exchange  for  notes  or  rupees.3 
None  the  less  the  Commission  said  there  was  "no  objection 
in  principle  either  from  the  Indian  or  the  Imperial  stand- 
point" to  the  minting  in  India  of  sovereigns  and  half- 
sovereigns  "if  Indian  sentiment  genuinely  demands  it,  and 
the  Government  of  India  are  prepared  to  incur  the  expense. 
...  It  is  preeminently  a  question  in  which  Indian  senti- 
ment should  prevail."4  To  the  present  writer,  however, 
it  would  seem  that  the  coinage  of  gold  in  India  would  tend 
to  encourage  its  circulation  there,  and  that  this  would  be  an 
objection  in  principle  to  the  position  taken  by  the  Royal 
Commission  against  the  encouragement  of  such  circulation. 

1  Ibid.,  sec.  71.  •  Ibid.,  sec.  72. 

2  Ibid.,  sec.  72.  4  Ibid.,  sec.  73. 
L 


146  MODERN  CURRENCY  REFORMS 

Indian  Currency  since  the  Outbreak  of  the  European  War 

The  final  Report  of  the  Royal  Commission  was  not 
rendered  until  February  24,  1914.  Scarcely  had  it  been 
published  and  circulated  when  the  European  War  broke 
out,  and  currency  reform  in  India  was  compelled  to  give 
way  to  more  urgent  matters. 

It  is  too  early  to  speak  with  adequate  information  on 
the  functioning  of  the  Indian  currency  system  under  the 
stress  of  the  Great  War.  A  few  facts,  however,  stand  out 
prominently  during  the  first  twenty  months. 

On  July  31,  1914,  when  war  became  a  practical  certainty, 
exchange  in  Calcutta  and  Bombay  fell  suddenly  to  the  gold- 
export  point,  i.e.,  isH^.  Business  in  India  received  a 
bewildering  shock,  and  the  need  of  prompt  measures  by 
the  Government  became  manifest.  The  Government  acted 
quickly  by  issuing  a  Notification  on  August  3  along  the  line 
of  the  one  issued  early  in  the  crisis  of  igoj-oS.1  It  an- 
nounced that,  with  the  approval  of  the  Secretary  of  State  for 
India,  it  would  support  exchange  by  all  the  means  in  its 
power.  As  in  the  previous  crisis,  although  in  this  case  with 
more  justification,  the  Government  lacked  the  courage  to 
offer  to  sell  on  demand  sterling  drafts  on  London  at  the  gold- 
export  rate  in  unlimited  quantities.  None  the  less,  it 
offered  to  sell  such  bills  or  cable  transfers  weekly  until 
further  notice  to  a  maximum  limit  of  £1,000,000,  at  the 
rate  of  isffd.  f°r  demand  bills  and  15^!  for  tele- 
graphic transfers.2  Its  chief  resort  for  the  maintenance  of 
exchange  was  wisely  the  sale  of  drafts  on  London,  not  re- 
demption of  rupees  in  gold  in  India.  The  Government  in 
fact  took  measures  to  prevent  the  wasteful  absorption  into 
hoards  and  Indian  circulation  of  the  large  supplies  of  gold 
—  at  that  time  £12,900,000  —  held  in  Indian  government 
vaults.  During  the  forepart  of  August  1914  the  Govern- 

1  Cf.  supra,  pp.  117-118. 

2Cf.  [London]  Economist,  1914,  p.  912;  and  Statist,  1914,  p.  383. 


INDIAN  CURRENCY  SINCE  THE  CRISIS  OF   1907-1908     147 

ment's  weekly  offers  of  £1,000,000  in  sterling  bills  (or  tele- 
graphic transfers)  did  not  meet  the  total  bids  at  the  official 
rates,  but  this  situation  soon  passed,  and  since  August  1914 
the  Government's  offer  of  £1,000,000  a  week  has  been  much 
more  than  sufficient  to  meet  all  demands  at  the  official 
rates.1 

India's  trade  has  naturally  suffered  greatly  from  the  War, 
and  this  has  been  somewhat  more  true  of  her  import  trade 
than  of  her  export  trade.2  Certain  of  her  exports  have 
been  in  heavy  demand  for  War  needs,  and  as  a  result  ex- 
change soon  recovered,  and,  at  this  writing  (March  4,  1916), 
rates  in  Calcutta  and  Bombay  on  London  are  well  above 
par.  The  London  Economist  said  in  its  issue  of  October 
17,  1914,  "The  Indian  finance  and  currency  system  stood 
the  strain  of  the  August  days  of  crisis  better' than  that  of 
any  other  country.  .  .  ." 3  That  statement  may  be  too 
strong,  but  it  is  certainly  true  that  since  the  outbreak  of 
the  War  few  if  any  currency  systems  have  more  effectively 
met  the  shock  of  world  catastrophe. 

1  As  early  as  September  1914  the  bids  for  the  month  had  fallen  to  £1,515,- 
ooo,  while  the  Government's  offers  were   £4,000,000.     Statist   (Dec.   26, 
1914),  p.  645. 

2  Cf.  Decline  in  India's  Foreign  Trade,  in  Commercial  and  Financial 
Chronicle,  103  (July  15,  1916),  pp.  209-210. 

3  P.  641. 


APPENDIX  A 
A  SELECTED  BIBLIOGRAPHY 

ANDREW,  A.  PIATT.  Indian  Currency  Problems  of  the  Last  Century. 
Quarterly  Journal  of  Economics,  XV,  1901,  pp.  483-516. 

Anonymous.  India's  Present  Monetary  Condition.  Economic  Jour- 
nal, XVII,  1907,  pp.  47-56. 

.  The  Monetary  Condition  of  India.  Economic  Journal,  X, 

1900,  pp.  455-^6. 

ATKINSON,  FRED  J.  Silver  Prices  in  India.  Journal  of  the  Royal 
Statistical  Society,  LX,  1897,  pp.  84-147. 

.  Rupee  Prices  in  India,  1898-1901.  Journal  of  the  Royal 

Statistical  Society,  LXVI,  1903,  pp.  103-118. 

.  Rupee  Prices  in  India,  1870  to  1008 ;  with  an  Examination  of 

the  Causes  Leading  to  the  Present  High  Level  of  Prices.  Journal 
of  the  Royal  Statistical  Society,  LXXII,  1909,  pp.  496-573. 

BARBOUR,  SIR  DAVTD.  The  Standard  of  Value.  London:  Macmil- 
lan  &  Co.,  1912. 

Board  of  Trade.  Report  on  Wholesale  and  Retail  Prices  in  the 
United  Kingdom,  1902,  with  Comparative  Statistical  Tables  for 
a  Series  of  Years.  London:  Eyre  &  Spottiswoode,  1903.  Brit- 
ish Blue  Book. 

BOTHE,  M.  Die  indische  Wahrungsreform  seit  1893.  Stuttgart  & 
Berlin:  J.  G.  Cotta'sche  Buchhandlung  Nachfolger,  1904. 

CHALMERS,  ROBERT.  A  History  of  Currency  in  the  British  Colonies. 
London:  Eyre  &  Spottiswoode,  1893. 

CONANT,  CHARLES  A.  The  Gold  Exchange  Standard  in  the  Light  of 
Experience.  Economic  Journal,  XIX,  1909,  pp.  190-200. 

Correspondence  respecting  the  Proposals  on  Currency  Made  by  the 
Government  of  India.  London:  Eyre  &  Spottiswoode,  1898. 
British  Blue  Book,  Cd.  8840. 

Deputy  Master  of  the  Mint.     Annual  Reports.    British  Blue  Books. 

Director  of  the  Mint.    Annual  Reports.    Washington. 

DODWELL,  H.  A.    Gold  Currency  for  India.    Economic  Journal, 

xxi,  1911,  pp.  387-392. 

149 


150  MODERN  CURRENCY  REFORMS 

DORAISWAMI,  S.  V.  Indian  Finance,  Currency  and  Banking.  My- 
lapore,  Madras:  Author,  1914. 

East  India.     Financial  Statements.    Annual,  1890-1915.     London: 

Eyre  &  Spottiswoode.     British  Blue  Books. 

— .  Statement  Exhibiting  the  Moral  and  Material  Progress  and 
Condition  of  India  during  the  Year.  Annual,  1890-1915.  Lon- 
don: Eyre  &  Spottiswoode.  British  Blue  Books. 

ELLSTAETTER,  KARL.  The  Indian  Silver  Currency.  An  Historical 
and  Economic  Study.  Translated  by  J.  Laurence  Laughlin. 
Chicago:  University  of  Chicago  Press,  1895. 

Fowler  Committee.  Indian  Currency  Committee  of  1898.  Report 
of  the  Committee  Appointed  to  Inquire  into  the  Indian  Cur- 
rency; with  Minutes  of  Evidence  and  Appendices.  London: 
Eyre  &  Spottiswoode,  1899.  British  Blue  Book. 

GIFEIN,  SIR  ROBERT.  The  Indian  Gold  Standard  Problem.  Eco- 
nomic Journal,  VIII,  1898,  pp.  301-313. 

GOODRICH,  H.  ST.  A.  Land  Revenue  in  Madras.  Economic  Jour- 
nal, I,  1891,  pp.  449-459- 

HARRISON,  F.  C.  An  Attempt  to  Estimate  the  Circulation  of  the 
Rupee.  Economic  Journal,  I,  1891,  pp.  721-751;  II,  1892,  pp. 
256-279. 

.     Silver  in  India.     Economic  Journal,  II,  1892,  pp.  653-661. 

.    The  Past  Action  of  the  Indian  Government  with  Regard  to 

Gold.     Economic  Journal,  III,  1893,  pp.  52-61. 

.     The  Indian  Currency  Question.     Economic  Journal,  IV,  1894, 

pp.  262-269. 

Herschell  Committee.  Indian  Currency  Committee  of  1892-1893. 
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Currency;  with  Minutes  of  Evidence  and  Appendices.  Lon- 
don: Eyre  &  Spottiswoode,  1893.  British  Blue  Book. 

This  Report  was  reprinted  as  a  United  States  Public  Docu- 
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HEYN,  OTTO.  Die  indische  Wahrungsreform.  Berlin:  J.  Guttentag, 
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HORTON,  DANA.  The  Suspended  Rupee  and  the  Policy  of  Contrac- 
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1892.  Washington:  Government  Printing  Office,  1893. 

KEYNES,  J.  M.  Indian  Currency  and  Finance.  London:  Macmil- 
lan  &  Co.,  1913. 


APPENDIX  A  151 

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of  Its  Monetary  Consequences.  Quarterly  Journal  of  Economics, 
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.  Money  and  Credit  Instruments  in  their  Relation  to  General 

Prices.  Second  Edition.  New  York:  Henry  Holt  &  Co.,  1909. 

LINDSAY,  A.  M.  Ricardo's  Exchange  Remedy.  London :  Effing- 
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.  How  to  Fix  Sterling  Exchange.  A  Well-tried,  Safe  and  Eco- 
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.  The  Report  on  Indian  Finance  and  Currency  in  Relation  to 

the  Gold  Exchange  Standard.  Economic  Journal,  XXIV,  1914, 
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Guillaumin  et  Cie.,  1905. 

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Wilson  &  Co.,  1897. 

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the  Society  of  Arts,  March  27,  1903. 

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Spottiswoode,  1888.  British  Blue  Book. 

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152  MODERN  CURRENCY  REFORMS 

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PART  II 

THE    PORTO    RICAN    CURRENCY    REFORM    OF 

1899-1900 


CHAPTER  I 

CURRENCY  HISTORY  OF  PORTO  Rico  PRIOR  TO  THE  AMERI- 
CAN OCCUPATION 

THE  Porto  Rican  currency  reform  of  1899-1900  differs 
from  most  other  currency  reforms  in  the  simplicity  of 
its  plan  and  in  the  shortness  of  the  period  in  which  it  was 
carried  through.  The  plan  of  reform  adopted  was  the  one 
which  would  most  naturally  suggest  itself  to  the  superficial 
observer,  and  the  work  of  effecting  the  transition  from  the 
old  currency  to  the  new  was  almost  entirely  accomplished 
within  a  period  of  three  months.  This  reform  involved  a 
great  increase  in  the  unit  of  value  and  affords  the  student 
of  monetary  science  valuable  lessons  as  to  the  economic 
results  of  large  and  rapid  increases  in  the  monetary  unit. 

In  order  to  facilitate  an  understanding  of  the  monetary 
problems  that  confronted  the  American  Government  at  the 
time  of  the  American  occupation  and  of  the  attitude  of  the 
Porto  Rican  people  to  the  different  reform  plans  suggested, 
it  will  be  advisable  to  summarize  briefly  the  recent  monetary 
history  of  the  Island  under  the  Spanish  regime. 

Monetary  History  of  Porto  Rico  from  1879  to  the  Reform  of 

1895 

A  convenient  starting  place  for  this  study  is  the  year 
1879,  the  year  in  which  the  Mexican  peso  became  legally 
current  in  the  Island.  For  some  time  prior  to  that  year l 

1  The  reader  interested  in  the  extremely  varied  monetary  history  of  Porto 
Rico  will  find  it  summarized  in  a  series  of  newspaper  letters  written  for  El 
Aguila  de  Puerto  Rico,  of  Ponce,  Porto  Rico,  in  the  spring  of  1910  by 


156     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

the  principal  coins  of  Porto  Rico  had  been  Spanish  and 
American  silver  and  gold  coins,  although  there  were  in 
circulation  also  English  sovereigns,  French  napoleons,  and 
certain  other  foreign  coins,  notably  from  South  America.1 
These  different  coins  were  legally  current  at  certain  es- 
tablished rates,  the  nominal  unit  of  value  being  the  Spanish 
five-peseta  piece,  peso  or  duro  —  a  coin  of  25  grams  .900  fine, 
or  of  approximately  93.5  per  cent  of  the  silvei  content 
of  an  American  silver  dollar. 

In  the  year  1873  slavery  was  by  Spanish  law  abolished  in 
the  Island,  and  bonds  were  issued  for  the  purpose  of  provid- 
ing funds  with  which  to  compensate  the  slave  owners.  A 
French  syndicate  in  1879  bought  the  slave  bonds  and  was 
granted  the  privilege  of  making  payment  in  imported  Mexi- 
can pesos.  These  Mexican  pesos  were  given  legal  currency 
by  a  royal  order  of  February  22,  1879.  They  were  over- 
valued in  circulation  as  compared  with  the  other  coins, 
and,  since  they  could  be  freely  imported  and  silver  was  at 
the  time  depreciating  in  terms  of  gold,  they  gradually  drove 
out  of  circulation  the  Spanish  and  American  gold  and  most 
of  the  other  silver  coins,  including  the  Spanish  peso,  thus 
becoming  the  dominant  currency  of  the  Island.  Although 
the  Spanish  peso  continued  to  be  the  nominal  unit,  and  the 
Mexican  peso  was  legally  rated  as  only  95  per  cent  of  a 
Spanish  peso,  for  all  practical  purposes  the  Mexican  peso 
was  the  monetary  unit  of  the  country.2 

Rafael  L6pez  Landr6n,  and  republished  in  book  form  in  1911  under  the  title 
Cartas  Abiertas  para  el  Pueblo  de  Puerto  Rico  (pp.  64-98).  The  letters 
exhibit  a  rather  crude  monetary  philosophy  on  the  part  of  the  author, 
but  the  statements  of  fact,  regardless  of  their  interpretation,  appear  to  be 
fairly  reliable. 

A  good  brief  historical  account  of  the  Porto  Rican  currency  is  contained 
in  a  memorandum  prepared  in  1899  by  the  Civil  Secretary  of  Porto  Rico, 
Cayetano  Coll  yToste,  Jr.  See  Davis,  Annual  Report,  1899,  pp.  708-709. 

1  A  list  of  the  gold  and  silver  coins  most  current  in  Porto  Rico  in  1878,  with 
their  respective  bullion  contents  and  money  values,  will  be  found  in  Manuel 
Ubeda  y  Delgado,  Isla  de  Puerto  Rico,  Estudio  Historico,  Geographico  y 
Estadistico  de  la  Mesura,  pp.  90-91. 

2  Cf.  Landr6n,  pp.  69,  72-76;  Robert  P.  Porter,  Report  on  the  Currency 


CURRENCY  HISTORY  OF  PORTO  RICO  I  $7 

As  the  price  of  silver  continued  to  decline  there  was  a  con- 
sequent increase  in  the  importation  of  Mexican  pesos  and 
a  rise  in  foreign  exchange.1  The  latter  part  of  1886,  the 
Spanish  Government,  with  a  view  to  maintaining  values  in 
Porto  Rico,  issued  a  decree  prohibiting  the  further  importa- 
tion of  Mexican  pesos.  Henceforth  only  such  Mexican  pesos 
as  bore  the  date  of  1886  or  of  earlier  years  were  legally  cur- 
rent. This  limited  the  supply  of  money,  divorced  the  value 
of  the  monetary  unit  from  that  of  silver,  and  transferred 
Porto  Rico  from  a  silver  standard  to  a  fiduciary  standard 
similar  to  that  prevailing  in  the  Philippines  from  1877 
to  iSgS.2 

The  following  chart  will  show  in  a  rough  way  the  relation 
of  the  exchange  value  and  the  bullion  value  of  the  Mexican 
peso  for  the  years  1890  to  1895,  reliable  data  for  earlier 
years  not  being  available.3  For  the  convenience  of  the 
American  reader  exchange  rates  have  been  converted  to 
the  value  of  the  Mexican  peso  in  terms  of  United  States 
money.  A  glance  at  the  chart  will  show  that  after  the  be- 
ginning of  1891  the  value  of  the  peso  as  measured  by  New 
York  exchange  continually  ruled  substantially  above  its 
bullion  value.  From  March  1891  to  December  1895  the 
differentials  between  the  dominant  New  York  exchange 
rate  and  the  maximum  monthly  bullion  value  of  the  peso 
varied  from  3  per  cent,  in  July  1891,  to  nearly  40  per  cent, 
in  March  1894.  The  differential  was  largest  during  the 
year  and  a  half  following  the  great  drop  in  silver  consequent 

Question  of  Porto  Rico  to  the  Secretary  of  the  Treasury,  January  3,  1899, 
pp.  8-9. 

1  Rates  in  Porto  Rico  on  New  York  are  quoted  in  terms  of  the  number  of 
Porto  Rican  pesos  required  to  buy  $100  in  New  York,  e.g.  150  or  170. 
Often  these  rates  are  spoken  of  in  terms  of  percentage '  premium,  as  for 
example  50  per  cent  or  70  per  cent.    Spanish  exchange  was  quoted  like 
New  York  exchange.     Sterling  exchange  was  quoted  in  terms  of  the  number 
of  pesos  to  the  pound  sterling,  e.g.  7.70,  7.80,  etc. 

2  Cf.  infra,  pp.  235-36. 

8  A  table  giving  the  figures  on  which  this  chart  is  based  will  be  found  in 
Appendix  A,  pp.  247-53. 


158     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

on  the  closing  of  the  Indian  mints  (June  1893)  and  the 
repeal  of  the  Sherman  Silver  Purchase  Act  (November  i, 


VARIATIONS  IN  YALUES  OF  MEXICAN  PESO,  1890 
CTS. 


1895 
CTS. 


30 


1893),  i.e.,  July  1893  to  December  1895.  During  this  period 
the  exchange  value  of  the  peso  tardily  followed  the  bullion 
value  in  the  direction  of  a  lower  level.  For  the  period  the 
oscillations  of  the  exchanges  were  the  reflections  chiefly  of 
the  demand  and  supply  of  merchandise  bills,  and  had  little 
relation  to  the  price  of  silver,  except  in  so  far  as  declines  in 
silver  made  the  smuggling  of  Mexican  pesos  into  Porto 
Rico  more  profitable,  and  thereby  tended  to  increase  this 
illicit  traffic.  The  situation  in  this  regard  was  very  similar 
to  that  existing  in  the  Philippines  in  the  latter  days  of  the 
Spanish  regime.1  The  law  denied  legal  currency  to  Mexican 
pesos  bearing  later  dates  than  1886,  but  coins  of  earlier 
dates  were  smuggled  into  the  Island,  and  also  those  of  later 
dates,  the  dates  having  first  been  altered.  This  was  often 

1  Infra,  p.  248,  note. 


CURRENCY  HISTORY  OF  PORTO  RICO  159 

done,  it  is  reported,  with  the  connivance  of  Spanish  govern- 
ment officials,  and  a  more  or  less  regular  contraband  trade 
in  Mexican  pesos  was  conducted. 

The  evils  of  a  fluctuating  exchange,1  with  a  declining  gold 
value  of  the  peso,  the  well-known  smuggling  abuses,  and 
the  general  dissatisfaction  arising  from  the  fact  that  the 
country's  currency  consisted  chiefly  of  foreign  coins  possess- 
ing the  unlimited  coinage  privilege  in  another  country, 
and  therefore  largely  beyond  the  control  of  the  Colony  or  its 
sovereign  State,  gave  rise  to  frequent  complaints  in  Porto 
Rico,  and  to  petitions  for  currency  reform.  The  hope 
and  expectation  in  the  Colony  appears  to  have  been  that 
the  Island's  monetary  system  would  be  assimilated  to 
that  of  the  mother  country.2 

The  Currency  Reform  of  1895 

In  1895  the  Spanish  Colonial  Minister  (Ministro  de  Ul- 
tramar) took  the  subject  under  advisement,  and  con- 
sidered three  different  proposals :  (i)  the  introduction  of  a 
gold  standard  with  gold  coins  in  circulation;  (2)  the  in- 
troduction of  the  Spanish  monetary  system  with  Spanish 
silver  coins;  and  (3)  the  creation  of  a  distinctive  Porto 
Rican  coinage,  the  unit  to  be  a  peso  of  the  same  weight 
and  fineness  as  the  Spanish  five-peseta  piece,  but  to  bear  a 
distinctive  Porto  Rican  stamp.  It  is  not  necessary  to 
enter  into  the  details  of  the  arguments  advanced  for  and 

1  "In  February,  1895,  exchange  rose  suddenly  and  fully  30  per  cent  within 
a  few  days,  owing  to  the  smuggling  of  P  600,000  Mexican  silver;  [the 
symbol  "  P  "  will  be  used  throughout  this  paper  to  signify  pesos  in  con- 
trast to  "  $  "  signifying  U.S.  dollars]  but  it  dropped  down  almost  as  fast 
when  the  momentary  requirement  of  drafts  was  covered."  Henry  K.  Car- 
roll, Special  Commissioner  of  the  United  States  to  Porto  Rico :  Report  on 
the  Island  of  Porto  Rico,  etc.,  p.  478. 

3  As  early  as  1864  a  law  was  actually  published  fixing  as  the  monetary 
unit  the  Spanish  escudo,  and  providing  other  coins  of  gold,  silver,  and  copper 
for  the  provinces  of  Ultramar,  including  Porto  Rico ;  but  the  law  was  never 
put  into  operation  in  the  Island.  Cf.  Landr6n,  pp.  70-71. 


160    THE  PORTO  RICAN   CURRENCY  REFORM  OF   1899-1900 

against  these  plans.1  Suffice  it  to  say  that  the  plan  of  a 
gold  standard  with  gold  coins,  while  looked  upon  as  an  ulti- 
mate ideal,  was  thought  to  be  out  of  the  question  at  that 
time  because :  (a)  it  would  be  altogether  too  expensive, 
and  it  was  unreasonable  to  expect  Spain  to  place  her  colony 
upon  a  strict  gold  standard  when  she  could  not  afford 
such  a  monetary  luxury  for  herself ;  and  (b)  gold  if  intro- 
duced into  circulation  would  immediately  disappear,  thus 
denuding  the  Island  of  its  currency. 

The  objection  to  the  proposal  to  assimilate  the  currency 
of  Porto  Rico  to  that  of  Spain  was  even  less  convincing. 
It  was  chiefly  that  if  Spanish  money  were  substituted  for 
Mexican  pesos,  the  Spanish  money  would  be  drawn  out  of 
the  Island  and  exported  to  Spain  in  settlement  directly  of 
trade  balances  due  Spain,  and,  through  Spain,  indirectly,  of 
balances  due  other  countries.  This  would  cause  a  rarefi- 
cation  of  the  Porto  Rican  currency  and  would  result  in 
serious  financial  disturbances  and  disaster.2  The  fallacy  of 
this  naive  reasoning  is  obvious.  Clearly  the  very  rarefica- 
tion,  which  the  Minister  feared,  would  have  so  tightened 
the  Porto  Rican  money  market  as  to  protect  the  insular 
currency  supply  against  depletion,  and  even  to  draw  more 
money  from  Spain  when  it  was  urgently  needed  in  the  Is- 
land. A  country  like  Porto  Rico,  moreover,  having  only 
about  6,000,000  pesos  of  metallic  money  in  circulation, 
could  not  have  pumped  a  disturbing  amount  of  money 
into  the  Spanish  circulation  at  home;  nor  could  it  have 

1  For  a  detailed  discussion  of  this  subject  see :   Canje  de  la  Moneda 
en   Puerto  Rico.     Discursos  pronunciados  por  el  Excmo.  Sr.  D.  Tomas 
Castellano,   Ministro  de  Ultramar,  en  las  sesiones  del  Congreso  de  las 
dias  6  y  8  Agosto  de  1896  y  en  la  del  Sendao  del  n  del  mismo  mes  y  ano, 
pp.  20-22. 

2  Later,  as  a  proof  that  this  would  have  taken  place,  the  fact  (p.  164)  was 
cited  that  the  Spanish  copper  coins,  of  which  70,000  pesos  had  been  intro- 
duced in  1895,  and  which  as  fractions  of  the  Mexican  peso  were  undervalued 
as  compared  with  their  values  as  fractional  coins  in  Spain,  had  tended  to 
flow  back  to  Spain  and  would  all  have  flowed  back  had  they  not  had  holes 
bored  in  them  to  prevent  their  exportation. 


CURRENCY  HISTORY  OF  PORTO  RICO  161 

received  an  undue  amount  from  Spain  in  any  year  without 
its  promptly  " overflowing  the  channels  of  circulation" 
and  finding  its  way  back  to  the  home  land. 

A  Distinctive  Porto  Rican  Coinage  Introduced.  This  ob- 
jection, however,  appeared  conclusive  to  the  Spanish  au- 
thorities, and  as  a  result  the  third  plan,  namely  that 
of  a  distinctive  Porto  Rican  coinage,  was  adopted.  The 
action  was  taken  in  Spain  without  discussion  in  Porto 
Rico,  and  the  money  was  coined  and  arrangements  made 
for  putting  it  into  circulation  before  the  fact  became 
known  to  the  Porto  Ricans  l  (except  in  so  far  as  there  had 
been  official  "leaks")-  The  plan  was  inaugurated  with 
secrecy  and  dispatch  in  order  to  prevent  the  further 
smuggling  into  Porto  Rico  of  Mexican  currency,  which 
otherwise  would  have  occurred  with  the  object  of  taking 
advantage  of  the  "favorable  rate"  at  which  the  canje 
(exchange)  was  to  be  effected. 

The  three  cardinal  features  of  the  plan,  as  contemplated 
by  the  Spanish  authorities,  were  described  by  the  Colonial 
Minister.  They  were:2  (i)  Both  silver  and  gold  should 
be  legally  current  in  Porto  Rico,  and  preference  should  be 
given  to  gold,  which  should  be  legally  rated  at  a  pre- 
mium over  silver  approximately  equal  to  the  commercial 
premium  prevailing  in  Spain,  i.e.,  about  13!  per  cent. 
"This  rating,"  said  the  Minister,  "is  recommended,  not 
because  I  would  pretend  to  subject  the  foreign  exchanges 
to  such  a  premium,  but  rather  to  give  greater  facility  and 
encouragement  to  the  introduction  of  gold  coins  into  the 
circulation  of  the  Island,  in  the  future  when  the  economic 
conditions  have  improved."  (2)  The  unit  of  value  was  to 
be  a  peso  of  the  same  qualities  as  the  Spanish  duro,  with  the 
same  fineness  and  the  same  design,  the  chief  modification 
being  that  the  legend  "Isla  de  Puerto  Rico"  was  placed  on 
the  front  side  to  indicate  that  its  circulation  would  be 
limited  to  Porto  Rico.  This  coin  contained  approximately 
1  Castellano,  p.  41.  2  Ibid.,  p.  25. 

M 


1 62     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

8  per  cent  less  fine  silver  than  the  Mexican  peso.1  (3)  To 
afford  encouragement  to  those  whose  hopes  could  not  at  the 
moment  be  realized,  "but  the  realization  of  which  it  was 
none  the  less  possible  to  contemplate  for  the  future,  namely, 
to  those  who  hoped  that  a  time  might  arrive  when  the  silver 
money  of  Porto  Rico  would  circulate  in  Spain,  and  likewise 
that  of  Spain  in  Porto  Rico,"  there  were  to  be  inscribed  at 
the  bottom  of  the  new  pesos  the  words  "Un  peso,  igual  5 
pesetas." 

The  transition  to  the  new  basis  was  effected  during  the 
latter  part  of  1895  and  the  forepart  of  1896  by  royal  orders 
of  December  5  and  January  27.  The  rate  of  exchange  was 
the  long-established  legal,  though  purely  nominal  rate,  for 
Mexican  pesos  in  terms  of  Spanish  duros,  of  95  centavos  to 
the  peso  —  a  rate  representing  an  overvaluation  of  the  new 
coin,  on  the  basis  of  bullion  content,  of  1 1\  per  cent.  Pend- 
ing the  arrival  of  the  new  money,  which  was  coined  in  Spain 
out  of  silver  obtained  through  a  temporary  advance  from  the 
Bank  of  Spain,2  temporary  certificates  (billetes  de  canje) 
were  employed  in  making  the  exchange.  These  certificates, 
which  had  been  prepared  in  Spain  under  a  decree  of  August 
16,  were  issued  during  a  brief  period  of  21  days  in  some  42 
convenient  places  in  the  Island  in  exchange  for  the  Mexican 
pesos.3  They  had  coupons  attached  and  each  certificate 
and  coupon  bore  the  same  number.  As  many  of  the  certif- 
icates were  given  out  as  Mexican  pesos  were  offered,  the 

1  The  size  of  the  Spanish  duro,  or  five-peseta  piece,  under  the  Latin  Union 
agreement,  was  the  same  as  that  of  the  French  five-franc  piece,  i.e.  25  grams 
.900  fine.    This  gave  the  new  Porto  Rican  peso  a  fine  silver  content  of  347.2 
grains  or  about  .9352  of  that  of  an  American  silver  dollar,  and  .921  of  that 
of  the  full  weight  Mexican  silver  peso  for  which  it  was  to  be  a  substitute. 

The  Porto  Rican  fractional  silver  coins  of  4o-cents,  2o-cents,  lo-cents,  and 
5-cents  were  of  proportionate  weights  with  the  peso,  but  their  fineness  was 
.835  instead  of  .900.  Cf.  Federico  G.  Paton :  La  Fabricaci6n  de  las  Mone- 
das,  Table  6. 

2  Cf .  Castellano,  pp.  41-45 ;  Landr6n,  pp.  78-79 ;  Carroll,  p.  450 ;    and 
Davis,  Ann.  Rep.,  1900,  p.  172. 

3  Castellano,  p.  40. 


CURRENCY  HISTORY  OF  PORTO  RICO  163 

coupons  being  retained  by  the  exchange  officer.1  When  the 
new  Porto  Rican  pesos  arrived  the  certificates  were  redeemed 
on  presentation.  The  exchange  of  the  new  pesos  for  the 
certificates  was  effected  in  the  surprisingly  short  period  of 
eight  days. 

There  had  been  much  uncertainty  as  to  the  amount  of 
metallic  money  in  circulation  on  the  Island.  Estimates 
varied  widely,  some  being  several  times  as  large  as  others. 
The  estimate  accepted  by  the  Spanish  authorities  proved 
to  be  excessive.  There  were  coined  in  1895  and  the  forepart 
of  1896  at  the  Madrid  and  Sevilla  mints  for  Porto  Rico  the 
following  silver  coins : 2 

Peso  pieces P  8,500,021 

40  £  290,000.80 

20  $  670,001.20 

10  £  70,000.60 

5^  30,000.30 

Total P  9,560,023.90 

Of  this  sum  only  P  6,426,395  were  used.  The  balance  were 
returned  to  Spain  during  the  years  1896-9 7. 3  Furthermore, 
it  was  estimated  that  at  the  time  of  the  American  occupa- 
tion about  P  600,000  were  taken  back  to  Spain  by  Spanish 
soldiers.  This  would  have  left  a  silver  circulation  in  Porto 
Rico  of  P  5,826,395,  of  which  approximately  P  1,000,000 
consisted  of  fractional  coins.4 

Although  the  expenses  of  the  canje  were  very  large,5  the 
difference  between  the  bullion  value  of  the  new  coins  and 
that  of  the  old  ones  provided  a  sufficient  margin  to  give  a 
net  profit  on  the  entire  transaction  of  P  480,000  gold. 
This  was  sent  to  Porto  Rico  in  the  form  of  5-peso  gold 

1  Carroll,  p.  450. 

2  Paton,  La  Fabricaci6n  de  las  Monedas,  Table  6. 

3  Davis,  Ann.  Rep.,  1900,  p.  172 ;  and  Ann.  Rep.,  1899,  p.  505. 

4  Few  if  any  of  the  fractional  silver  coins  minted  for  Porto  Rico  in  1895 
and  1896  appear  to  have  been  taken  out  of  the  Island. 

1  Cf.  Cayetano  Coll  y  Toste  Jr.,  in  Davis,  Ann.  Rep.,  1899,  pp.  708-709. 


1 64     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

pieces1  legally  rated  to  circulate  at  1.20  to  the  peso.2  Of 
this  sum  P  410,916  were  exported  to  Spain  in  the  forepart  of 
1898  as  a  contribution  to  the  building  of  a  Spanish  cruiser 
to  be  named  " Puerto  Rico/'  which  as  a  matter  of  fact  was 
never  built,  leaving  a  balance  of  only  P  69,084,  which 
was  kept  in  the  Island.3  While  this  sum  of  gold  appears  in 
most  of  the  estimates  of  the  Porto  Rican  circulation  for 
1898,  it  was  in  no  proper  sense  of  the  word  part  of  the  cir- 
culating medium.  It  was  rated  in  the  market  at  a  high 
premium,  and  held  largely  in  hoards  and  as  souvenirs. 
Occasionally  money  changers  sold  small  quantities  to  per- 
sons returning  to  Spain  or  France.4 

One  other  item  in  the  metallic  money  of  Porto  Rico  that 
deserves  passing  mention  is  the  Spanish  copper  coin. 
Seventy  thousand  pesos  of  these  Spanish  copper  coins  were 
sent  to  Porto  Rico  in  1895.  Being  similar  fractions  of  a 
less  valuable  monetary  unit  in  Porto  Rico  than  in  Spain, 
they  began  to  flow  back  to  the  home  land  under  the  force  of 
Gresham's  law.  From  20,000  to  25,000  pesos  of  this  copper 
coin  was  remitted  by  merchants  to  Spain,  according  to  the 
Subgovernor  of  the  Spanish  Bank  of  Porto  Rico,*  before  the 
authorities  became  aware  of  the  fact  that  the  coins  were 
being  exported.  To  avoid  the  further  depletion  of  the 
country's  copper  currency  the  remaining  copper  coins  were 
punched,  and  were  thereby  deprived  of  the  privilege  of  legal 
circulation  in  Spain. 

Summarizing,  then,  we  may  say  that  at  the  time  of 
the  American  occupation  the  metallic  circulation  of 
Porto  Rico  in  round  numbers  was  approximately  as 
follows : 

1  Cf .  Castellano,  pp.  45-47 ;  and  Landr6n,  pp.  77-80. 

2  Castellano,  p.  51. 

3  This  appears  to  have  been  distributed  in  the  form  of  civil  and  military 
pensions  or  gratuities  to  old  government  employees  in  Porto  Rico.    Landr6n, 
p.  79. 

4  Cf .  Carroll,  p.  498,  also  p.  456. 

6  Ibid.,  p.  476,  and  Davis,  Ann.  Rep.,  1900,  p.  172. 


CURRENCY  HISTORY  OF  PORTO  RICO  165 

(1)  Porto  Rican  silver  pesos P  4,800,000 

(2)  Fractional  silver  coins  of  the  denominations  40  ff,  20  f{, 

10  £  and  $£ P  1,000,000 

(3)  Copper  coins  2  ff  and  i  ff,  say P        50,000 

Total P  5,850,000 

(4)  Gold  coins,  only  nominally  in  circulation     ....  69,000 

P  5,919,00° 

Bank  Notes.  In  addition  to  the  above  coins  there  were 
in  circulation  the  bank  notes  of  the  Spanish  Bank  of  Porto 
Rico.1  A  decree  of  May  5,  1888  had  conferred  upon  this 
bank  the  exclusive  privilege  of  bank-note  issue  in  Porto 
Rico  for  a  period  of  twenty-five  years.  The  issue  was  not 
to  exceed  three  times  the  amount  of  the  bank's  paid-up 
capital.  This  capital  was  P  900,000  but  could  be  increased 
to  P  1,200,000.  Prior  to  the  American  occupation  the  cir- 
culation is  said  to  have  exceeded  P  2,500,000,  but  Commis- 
sioner Carroll  in  his  preliminary  report  of  December  1898 
estimated  the  amount  then  outstanding  at  P  i,5oo,ooo.2 
These  notes  were  not  legal  tender,  but  were  received  by 
the  Government  and  normally  circulated  freely  in  the 
large  towns.  The  bank  was  required  by  law  to 

"have  constantly  on  hand,  in  current  gold  or  silver  coin, 
or  in  bars  of  said  metals,  at  least  the  third  part  of  the 
amount  of  the  notes  in  circulation,  and  the  other  two  thirds 
in  securities  of  preferred  guaranty,  sure  collection,  and  for 
a  period  not  exceeding  one  hundred  and  twenty  days."  3 

The  notes  were  payable  on  demand  at  the  place  of  issue.4 

1 A  history  of  this  bank,  and  translations  of  important  documents  relating 
to  it,  will  be  found  in  Senate  Miscellaneous  Documents,  s6th  Congress,  ist 
Session,  XII,  No.  197. 

2  Carroll,  p.  450. 

3  Sen.  Miscel.  Doc.,  s6th  Cong.,  ist  Sess.,  XII,  No.  197,  p.  6. 

4  A  form  of  quasi  paper  money  having  a  limited  circulation  in  one  city 
is  described  by  Mr.  T.  G.  J.  Weymouth,  a  banker  of  Porto  Rico  (Carroll, 
p.  454) :   "In  Ponce  they  use  a  considerable  amount  of  paper  money  of  the 
Caja  de  Ahorros  (savings  bank).    They  are  not  exactly  notes;  they  are  in 
the  nature  of  bills  payable  at  a  certain  date,  with  coupons  paying  interest, 
but  they  are  received  the  same  as  notes  by  merchants  and  others.    They  do 


l66    THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

How  the  New  Currency  System  Worked.  Such  were  the 
constituent  elements  of  the  Porto  Rican  currency  immedi- 
ately preceding  the  American  occupation.  The  unit  of 
value,  and  the  money  that  the  Spaniards  called  moneda 
regulador,  was  the  new  Porto  Rican  peso.  This  was  a 
fiduciary  coin,  as  had  been  its  predecessor,  the  Mexican 
peso,  in  Porto  Rico.  It  differed  from  the  Mexican  peso 
chiefly  in  the  fact  that  it  did  not  circulate  outside  of  Porto 
Rico,  and  therefore  could  not  be  smuggled  into  the  Island. 
Its  supply  was  controlled  by  the  Spanish  authorities,  and 
was  so  limited  that  it  circulated  at  a  gold  value  far  above  its 
value  as  bullion.  Although  containing  nearly  8  per  cent 
less  silver  than  the  Mexican  peso  it  tended  to  circulate  at  a 
higher  gold  value  than  would  the  Mexican  peso  because : 
(i)  by  the  exchange  of  Mexican  currency  for  the  new 
currency  at  95  the  metallic  money  in  circulation  was  re- 
duced by  about  5  per  cent ;  and  (2)  both  the  practice  and 
the  fear  of  illicit  importations  of  money  were  eliminated. 

The  immediate  effect  of  the  substitution  appears  to  have 
been  an  advance  in  the  gold  value  of  the  peso,1  and  a  great 
increase  in  the  differential  between  bullion  value  and 
money  value.  For  the  year  1895  the  average  monthly  dif- 
ferential between  the  bullion  value  of  the  peso  (high)  and 
the  prevailing  gold  exchange  value  was  7.7  cents,  while  for 
1896  the  averge  monthly  differential  for  the  new  peso  be- 
tween the  bullion  value  (high)  and  the  gold  exchange  value 
(low)  was  13.7  cents.  Here  was  a  case  where  the  exchange 
value  of  an  inconvertible  fiduciary  coin  rose  appreciably  in 
spite  of  the  fact  that  the  silver  content  was  decreased  by 
about  8  per  cent.  The  supply  of  money  in  circulation  was 
reduced,  and  confidence  in  the  money  was  increased.  This 
is  another  illustration  of  Ricardo's  dictum,  "no  depreciation 
except  from  excess."  A  reduction  in  the  bullion  value  of 
an  inconvertible  fiduciary  coin  reduces  the  money  value  only 

not  circulate  in  other  parts  of  the  Island,  however,  and  are  unknown  except 
in  Ponce."  *  Cf.  chart,  opposite. 


CURRENCY  HISTORY  OF  PORTO  RICO  167 

when  it  results  in  an  increase  in  the  monetary  supply,  or  a 
decrease  in  the  demand  (which  results  often  from  a  decline 
in  public  confidence).  In  this  instance  the  opposite  took 
place,  the  monetary  supply  was  reduced,  and  confidence  in 
the  money  was  strengthened.  Its  value  accordingly  rose. 

The  monthly  movements  in  the  exchange  and  bullion 
values  of  the  Porto  Rican  peso  for  the  next  four  and  a  half 
years  are  shown  graphically  on  the  following  chart.1 

VARIATIONS  IN  VALUES  OF  PESO,  1896-1900 


5 


A  glance  at  the  chart  will  show  that  the  gold  exchange 
value  of  the  peso  fluctuated,  from  January  1896  to  March 

1  Curves  represent  high  and  low  monthly  rates.  Those  for  New  York 
exchange  and  for  bullion  value  are  measured  from  the  schedule  on  the  left, 
while  that  for  sterling  exchange  is  entirely  separate  and  is  measured  from  the 
schedule  on  the  right.  The  rates  plotted  are  the  United  States  currency 
and  sterling  equivalents  of  the  quoted  rates.  They  are  based  upon  actual 
business  figures  compiled  for  the  writer  through  the  courtesy  of  the  American 
Colonial  Bank  of  San  Juan.  Figures  for  bullion  value  are  computed  from  the 
monthly  quotations  for  the  London  price  of  standard  silver  issued  by  Pixley 
&  Abell  of  London.  The  figures  upon  which  the  chart  is  based  will  be  found 
in  Appendix  B,  pp.  237-38. 


1 68     THE  PORTO  RICAN   CURRENCY  REFORM  OF   1899-1900 

1898,  with  a  general  downward  tendency,1  but  at  a  level  far 
above  the  bullion  value  of  the  peso.  The  normal  differen- 
tial was  in  the  neighborhood  of  13  to  16  cents,  while  the 
average  differential  between  bullion  value  (high)  and  gold 
exchange  value  (low)  for  the  twenty-seven  months  was 
13.9  cents.  Although  the  new  currency  was  an  improve- 
ment on  the  old  in  that  its  supply  was  completely  under  the 
control  of  the  authorities,  and  that  it  was  not  an  object  of 
illicit  trade,  it  was  not  much  more  stable  in  its  gold  value 
than  the  Mexican  peso  had  been  in  Porto  Rico  during  the 
last  two  years  of  its  history  there,  and  it  was  a  very  unsatis- 
factory money  from  the  standpoint  of  foreign  trade.  Aside 
from  the  uncertainties  arising  from  the  frequent  and  often 
substantial  oscillations  in  exchange  —  an  evil  particularly 
serious  in  a  country  like  Porto  Rico  which  exports  such  a 
large  proportion  of  what  it  produces,  and  imports  so  much 
of  what  it  consumes 2  —  there  was  the  handicap  of  monetary 
isolation.  Porto  Rico  was  a  country  with  less  than  a  million 
people,  and  with  a  total  metallic  circulation  of  less  than  six 
million  pesos.  None  the  less  it  had  a  distinctive  currency  of 
its  own,  and  that  currency  was  neither  on  a  gold  standard, 
a  silver  standard,  nor  the  fiduciary  standard  of  the  Spanish 
home  land ; 3  and  there  was  no  satisfactory  medium  for 

1  A  partial  explanation  of  the  downward  tendency  in  the  gold  value  of  the 
peso  was  the  uneasiness  in  business  caused  by  the  trouble  in  Cuba,  and  the 
consequent  withdrawal  of  capital  from  Porto  Rico.     Another  cause  was  the 
currency  inflation  resulting  from  the  large  bank-note  issue  of  the  Spanish 
Bank  of  Porto  Rico,  which  is  said  to  have  reached  as  high  a  figure  as  P  2,580,- 
ooo  or  a  sum  nearly  half  as  large  as  the  total  metallic  circulation  of  the  Is- 
land.    Cf.  Carroll,  p.  479. 

2  "Porto  Rico  has  been  an  exceptional  country  with  regard  to  its  ex- 
periences of  exchange.    It  is  hardly  possible  to  name  any  other  land  where 
oscillations  so  great  and  sudden  have  almost  prevented  foresight  and  cal- 
culations to  such  an  extent  that  operations  in  exchange  have  resembled 
gambling    rather    than    banking    transactions."     Carlos   M.  Soler,  Sub- 
governor  of  the  Spanish  Bank  of  Porto  Rico,  in  Carroll,  p.  472. 

3  Spain  would  not  accept  Porto  Rican  money  at  par  in  settlement  of 
Spanish  trade  balances,  and  exchange  rates  on  Spain  fluctuated  widely.    On 
October  26, 1898,  for  example,  Spanish  exchange  was  at  a  premium  of  10  per 


CURRENCY  HISTORY  OF  PORTO  RICO  169 

settling  foreign  trade  balances.  Porto  Rican  pesos  could 
not  be  exported,  and  foreign  coins  could  not  be  imported 
for  circulation  in  Porto  Rico.  While  there  appears  to  have 
been  some  adjustment  through  the  flow  back  and  forth 
of  small  quantities  of  Spanish  and  French  gold  coins  which 
had  a  ready  market  in  Porto  Rico  as  a  sort  of  merchandise, 
the  burden  of  adjusting  international  trade  settlements  fell 
heavily  upon  long  foreign  credits,1  and  upon  wide  fluctua- 
tions in  exchange  rates.2 

Spanish  American  War.  With  the  outbreak  of  the 
Spanish  American  War,  business  in  Porto  Rico  became 
demoralized,  foreign  trade  was  practically  stopped,  and 
there  was  a  great  clamor  on  the  part  of  foreign  merchants, 
especially  Spaniards,  for  means  to  get  their  capital  out  of 
Porto  Rico.  The  demand  for  exchange  became  extremely 
heavy  and  rates  soared  to  unprecedented  heights,  repre- 
senting a  depreciation  in  the  gold  value  of  the  Porto  Rican 
peso,  as  shown  by  the  large  dip  in  the  chart,  from  57 
cents  in  March  to  40  cents  in  May  and  July.  The  rate 
representing  the  lowest  sterling  value  (namely  20  pence) 
was  reached  in  July,  the  force  under  General  Miles  having 
landed  July  25.  When  the  American  flag  was  raised 
over  San  Juan  October  18,  exchange  had  pretty  well 

cent  and  a  fortnight  before  was  at  a  premium  of  16  per  cent.     Cf.  Carroll, 

P-  457- 

1  Mr.  William  R.  Corwine,  who  was  sent  to  Porto  Rico  in  1899  by  the 
Merchants  Association  of  New  York  to  report  on  commercial  conditions  in 
that  Island,  reported  that  English  merchants  generally  gave  credit  for  nine 
months  on  shipments  to  Porto  Rico,  Spanish  and  German  merchants  for  six 
to  nine  months,  while  American  merchants  as  a  rule  demanded  cash  or  cash 
terms.     Report  on  Porto  Rico  to  the  Merchants  Association  of  New  York. 
New  York,  June  5,  1899. 

2  Obviously  an  abnormally  high  rate  of  exchange  (expressed  in  terms  of 
pesos)  favored  exporters  and  handicapped  importers,  thus  tending  to  stimu- 
late exports  and  depress  imports ;  while  an  abnormally  low  rate  favored 
importers  and  handicapped  exporters,  thus  tending  to  stimulate  imports 
and  depress  exports.     Either  the  high  rate  or  the  low  rate,  if  pronounced  and 
long  continued,  would  tend  to  force  the  trade  balance  in  the  opposite  direc- 
tion.    Long  credit  periods  allowed  time  for  different  seasonal  tendencies  to 
compensate  each  other. 


170     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

recovered,  although  rates  were  still  rather  nominal.  By 
January  1899  it  had  entirely  recovered,  and  the  gold 
exchange  value  of  the  peso  then  attained  a  level  slightly 
higher  than  it  had  had  for  some  time  prior  to  the  War. 
From  that  time  forward  Porto  Rican  exchange  was  fairly 
constant  at  this  level. 

The  depreciation  of  the  Porto  Rican  peso  in  the  spring  and 
summer  of  1898  as  measured  by  exchange  rates  was  great, 
reaching  in  two  months  as  much  as  30  per  cent.  The  reader 
should  be  on  his  guard,  however,  not  to  over-estimate  the 
importance  of  this  decline.  It  was  but  temporary,  and  the 
amount  of  business  done  at  these  abnormal  rates  was  small. 
The  Subgovernor  of  the  Spanish  Bank  of  Porto  Rico  char- 
acterized the  rates  prevailing  from  April  to  September  1898 
as  "  merely  nominal  and  at  the  same  time  capricious  and 
arbitrary."  1 

1  Carroll,  p.  473. 


CHAPTER  II 

CURRENCY  REGULATIONS  UNDER  UNITED  STATES  MILITARY 
GOVERNMENT 

WITH  the  landing  of  the  American  forces  in  Porto  Rico 
there  was  created  a  dual  currency.  The  five  thousand 
Spanish  troops  who  had  been  permanently  stationed  in 
the  Island  had  been  paid  in  Porto  Rican  currency  out  of 
Porto  Rican  revenues  —  a  situation  involving  no  currency 
difficulties;  but  the  wages  of  the  American  troops  were 
payable  in  United  States  currency  and  the  funds  were 
drawn  from  the  United  States.  From  the  beginning,  army 
accounts  were  kept  in  United  States  currency.  As  soon 
as  hostilities  were  over  there  was  an  influx  of  American 
travelers  and  business  prospectors,  all  of  whom  brought 
with  them  American  money.  This  money  quickly  found 
a  limited  circulation  in  the  cities  and  in  the  neighbor- 
hood of  the  army  posts. 

Confusion  Caused  by   Various  Rates  between  Porto  Rican 
and  United  States  Currency 

On  July  28,  as  soon  as  Ponce  was  occupied  by  the  Ameri- 
can troops,  General  Miles  issued  an  order  fixing  the  official 
exchange  rate  for  the  custom-house  at  two  pesos  to  the 
dollar,  or  "2  to  i"  as  it  was  commonly  expressed.  This 
fifty-cent  rate  at  the  beginning  was  looked  upon  generally 
as  reasonable,  and  was  used  by  the  military  authorities  in 
the  purchase  of  supplies  and  in  certain  dealings  with  the 
natives.  "For  a  time  and  in  small  amounts,  the  custom- 

171 


172     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

house  would  pay  to  those  connected  with  the  Government 
two  pesos  for  each  dollar  turned  in.  ..."  1  A  reference 
to  the  chart  will  show  that  this  fifty-cent  gold  value  assigned 
to  the  peso  was  considerably  greater  than  the  gold  value 
of  the  peso  at  that  time  as  expressed  in  either  New  York 
or  sterling  exchange.  It  was  also  greater  than  the  amount 
of  United  States  currency  allowed,  in  some  places  at  least, 
in  direct  exchange  for  pesos,  which  was  as  low  as  45!  cents 
(i.e.  "a  rate  of  2.2o").2  This  early  low  gold  valuation  of 
the  peso  was,  however,  abnormal  and  temporary.  Shortly 
before  the  war  the  peso  had  a  gold  exchange  value  of  58  to 
60  cents,  and  as  soon  as  confidence  began  to  be  restored  it 
was  but  natural  that  this  fiduciary  unit  should  appreciate  to 
its  former  gold  value.  By  referring  to  the  chart  the  reader 
will  see  how  rapid  the  reaction  was.  The  minimum  monthly 
gold  value  as  measured  by  exchange  rose  from  40  cents  in 
July  to  51.3  cents  in  September,  54.8  cents  in  November, 
and  reached  60  cents  at  the  beginning  of  the  new  year.  The 
50-cent  rate  became  a  great  undervaluation  of  the  peso. 
The  market  rate  gradually  rose  to  54  cents3  (P  1.85), 
59  cents  (P  1.70),  61  cents  (P  1.65),  and  sometimes  even 
higher. 

For  some  time  there  was  great  lack  of  uniformity,  widely 
different  rates  existing  in  different  parts  of  the  Island,  and 
often  in  different  parts  of  the  same  city.  Clarence  Wiener, 
a  contemporary  writer  in  the  North  American  Review,  said : 

"The  only  bank  now  under  the  jurisdiction  of  the  Union, 
the  only  one  except  that  of  San  Juan,  has  been  giving  but 
one  hundred  and  seventy  centavos  for  one  dollar  of  the 
United  States  ...  [59  cents  to  P  i],  but  recently  this  rate 

1  Carroll,  p.  158. 

2  General  Guy  V.  Henry,  Journal  Social  Science  Association,  Dec.  1899, 

P-   159- 

3  In  giving  these  United  States   currency  equivalents   of  the  quoted 
rates  which  were  expressed  in  the  number  of  pesos  to  the  dollar,  or  to  the 
hundred  dollars  as  given  in  parentheses,  figures  are  given  to  the  nearest 
cent. 


REGULATIONS  UNDER    MILITARY    GOVERNMENT        173 

was  reduced  to  only  one  hundred  and  fifty  centavos  for  a 
dollar  .  .  .  [66f  cents  to  Pi].  For  several  months  this 
bank  paid  1.75 :  i  [57  cents  to  P  i];  the  merchants  from 
i. 60:  i  [62-3-  cents  to  P  i]  to  2.00:1;  now  all  dealers 
about  Ponce  have  followed  the  lead  of  their  bank,  compell- 
ing the  rate  of  1.50:  i  [66f  cents  to  P  i]  for  our  silver, 
our  notes  and  our  gold." 

At  one  time  it  was  reported  that  the  rate  in  Ponce  was 
1.50  (66f  cents  to  P  i) ;  that  in  Guayama  1.75  (57  cents  to 
Pi);  and  that  in  San  Juan  1.80  (55!  cents  to  P  i)  for  United 
States  gold,  1.75  (57  cents  to  P  i)  for  paper,  and  1.65  (61 
cents  to  P  i)  for  silver.2 

The  results  of  such  a  situation  are  easy  to  imagine. 
In  the  first  place,  as  the  Government  greatly  undervalued 
the  peso  at  the  custom-house,  it  received  few  pesos  in 
payment  of  duties,  payments  mostly  being  made  in  United 
States  currency.  On  the  other  hand,  for  the  Government 
a  peso  went  farther  than  fifty  cents  in  the  purchasing  of 
local  supplies  and  in  the  hiring  of  native  labor.  Soon  the 
customs  authorities,  although  continuing  to  receive  pay- 
ments for  duties  at  "  2  to  i,"  were  compelled  to  discontinue 
the  practice  of  paying  out  two  pesos  for  an  American 
dollar  even  in  limited  quantities  to  persons  connected 
with  the  Government.  This  official  action,  said  the  Mili- 
tary Governor,  was  not  pleasantly  received.3  The  soldier 
found  that  his  American  dollar  would  purchase  much  less 
than  would  two  pesos. 

"He  would  make  a  purchase,  pay  his  dollar,  obtaining 
credit  at,  say,  1.65,  Porto  Rican  valuation.  The  Porto 
Rican  would  take  the  soldier's  one  American  dollar,  go  to 
the  custom-house  in  the  payment  of  his  duties,  and  obtain 
credit  for  two  pesos,  the  soldier  thus  helping  the  Porto 

*N.  Am.  Rev.,  Dec.  1898,  p.  754. 

1  Cf.  ibid.,  p.  755 ;    and  W.  Dinwiddie,  The  Money"  of  Puerto   Rico, 
Harper's  Weekly,  42  (1898),  p.  1286. 
'Henry,  p.  158. 


174     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

Rlcan  some  35  centavos  ...  on  each  payment  of  one  dollar, 
and  the  soldier  being  out  on  each  one  dollar  transaction, 
the  amount  gained  by  the  Porto  Rican."  1 

A  merchant  too  might  receive  the  dollar  at  P  1.50  and 
pay  it  out  in  the  purchase  of  supplies  in  a  near-by  city  at 
the  rate  of  P  1.75,  thereby  making  a  profit  on  exchange  of 
i6f  per  cent.  If  he  received  it  at  P  1.75  and  was  allowed 
only  P  1.50  when  he  paid  it  out,  he  would  of  course  suffer 
the  corresponding  exchange  loss  of  over  14  per  cent.  With 
such  different  valuations  in  different  parts  of  the  Island,  and 
with  so  much  uncertainty  as  to  the  future  of  the  peso, 
there  naturally  grew  up  a  large  amount  of  purely  exchange 
speculation.2  Dollars  were  bought  where  the  rate  was  low 
and  sold  where  it  was  high,  and  a  great  many  business 
concerns  other  than  banks  are  said  to  have  gone  into  this 
money  exchanging  business. 

Government  Declares  an  Official  Rate  of  60  Cents  to  the  Peso 

To  bring  order  out  of  this  confusion,  and  at  the  same  time 
to  recognize  the  restored  gold  value  of  the  peso,  President 
McKinley  issued  an  order  on  January  i,  1899,3  fixing  an 
official  rate  of  60  cents  to  the  peso  (Pi.66f  to  $i) 
throughout  the  Island.  Among  other  things,  the  order 
provided  that  on  and  after  February  i,  1899  all  customs, 
taxes,  public  and  postal  dues  in  the  Island  of  Porto  Rico 
should  be  paid  in  United  States  money,  or  in  certain  foreign 
gold  coins  at  established  rates,  or  in  the  Porto  Rican  and 
Spanish  silver  coins  circulating  in  the  Island  at  the  rate  of 
60  cents  to  the  peso.  It  provided  further  that  out  of  the 
Porto  Rican  coins  so  received  a  convenient  supply  should 
be  retained  and  carried  for  exchange  for  United  States 
currency  at  the  rate  of  60  cents  to  the  peso.  It  declared 

1  Henry,  p.  159. 

2  Cf.  Wiener,  p.  755- 

3  The  order  is  given  in  full  in  Carroll,  p.  496. 


REGULATIONS  UNDER   MILITARY    GOVERNMENT      175 

that  all  existing  contracts  for  the  payment  of  money  in  the 
currency  of  Porto  Rico  might  be  discharged  in  that  money 
or  in  United  States  money  at  this  official  rate.  A  glance 
at  the  figures  for  New  York  and  sterling  exchange 
prevailing  at  the  end  of  the  year  1898,  as  shown  on  the 
chart,  will  show  that  the  6o-cent  rate  was  a  close  approxi- 
mation to  the  exchange  value  of  the  peso  at  that  time. 

It  soon  appeared,  however,  that  it  was  one  thing  to  de- 
clare an  official  rate  of  equivalents  for  a  dual  currency, 
and  another  thing  to  make  that  rate  effective.  The  Govern- 
ment could  fix  the  rate  at  which  it  would  receive  payments 
in  the  two  currencies,  but,  having  done  so,  must  receive  the 
kind  of  currency  offered,  i.e.,  the  overvalued  one.  It  could 
also  fix  a  rate  at  which  existing  contracts  payable  in  pesos 
could  be  settled  in  dollars.  It  could  not,  however,  easily 
control  the  rates  at  which  United  States  currency  would 
be  received  in  cash  transactions,  nor  the  price  and  wage 
adjustments  which  the  substitution  of  dollars  for  pesos 
would  call  forth. 

The  market  did  not  adequately  respond  to  the  official 
rate  of  P  i.66f  to  $i.  Merchants  still  held  to  the  rate 
of  P  1.65  or  P  i. 60,  and  sometimes  to  lower  rates.  Gen- 
eral Henry,  the  Military  Governor,  reported  that  cabinet 
officers,  judges  of  the  courts,  and  subordinates  complained 
that  while  they  were  paid  in  pesos,  payments  were  exacted 
of  them  in  dollars.  He  was  compelled  to  recognize 
the  market  rate  as  against  the  official  rate  in  paying  some 
15,000  laborers  working  for  the  Government,  in  order  to 
protect  them  from  losing  on  exchange.1 

An  effort  was  made  at  first  to  force  the  market  to  con- 
form to  the  official  rate.  It  may  best  be  described  in  the 
words  of  the  Military  Governor  who  was  responsible  for  it : 2 

"  Finding  this  [official  valuation]  was  not  accepted  outside 
the  custom-houses,  I  directed  the  custom-houses  at  San 

1  Henry,  pp.  159-60.  2  Ibid. 


176    THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

Juan,  Ponce,  and  Mayaguez  to  keep  on  hand  for  exchange 
at  the  above  rate,  Porto  Rican  money.  In  no  case  was  it  to 
be  exchanged  for  persons  engaged  in  exchanging  money  for 
profit.  So  long  as  this  exchange  of  money  continued,  it  was 
directed  [that]  no  person  engaged  in  business  in  Porto  Rico 
refuse  to  accept  American  money,  when  tendered  at  the 
rate  prescribed  by  the  President  of  the  United  States. 

"  In  the  same  order  [General  Order  No.  30,  March  8, 
1899] *  it  was  urgently  recommended  that  all  tradesmen 
throughout  the  Island  express  the  price  of  their  goods  in 
American  money,  with  alternate  prices  in  Porto  Rican 
money,  with  due  regard  to  the  authorized  rate  of  exchange.2 
This  plan  failed  owing  to  the  impossibility  of  keeping  on 
hand  the  necessary  Porto  Rican  money  for  exchange." 3 

This  order  also  provided  that,  "on  and  after  July  i,  1899, 
and  until  further  orders,  all  public  dues,  insular  and  munici- 
pal taxes,  fines  and  costs  will  be  assessed  in  United  States 
money.  When  changes  in  dues,  salaries,  etc.,  are  not  pro- 
vided for,  the  amount  of  dues,  salaries,  etc.,  will  be  deter- 
mined in  accordance  with  the  prescribed  rate  of  exchange." 


Discrimination  against  American  National  Bank  Notes 

There  was  in  some  places  discrimination  against  Ameri- 
can national  bank  notes.4  No  American  national  banks 
were  located  in  Porto  Rico,  and  there  was  no  place  at  which 
national  bank  notes  could  be  readily  converted  into  silver 

1  Davis,  Ann.  Rep.,  1899,  p.  580. 

2  For  an  account  of  the  manner  in  which  a  similar  stituation  was  met  in 
Manila,  in  1904,  see  infra,  pp.  329-30. 

3  At  one  time  the  plan  appears  to  have  been  contemplated  of  coining  on 
government  account  an  additional  stock  of  this  domestic  money  to  be  offered 
freely  in  exchange  for  United  States  currency  at  the  official  rate.    Ann. 
Rep.  Sec.  Treas.,  1898,  p.  xci. 

4  In  other  places  at  times  there  was  discrimination  against  gold  and  in  favor 
of  notes.    This  arose  from  the  fact  that  notes  could  be  shipped  to  the  United 
States,  for  remittances,  more  cheaply  than  gold.     Cf.  infra,  pp.  206—207 ; 
also  El  Billete  de  Banco  Americano,  in  El  Imparcial,  a  daily  paper  of 
Mayagiiez,  Porto  Rico,  June  6,  1899 ;  also  issues  of  June  14  and  24. 


REGULATIONS  UNDER  MILITARY  GOVERNMENT      177 

or  gold  on  demand.  Some  of  the  municipalities  refused  to 
receive  them  in  payment  of  taxes,  and  a  local  railroad  com- 
pany publicly  announced  that  it  would  receive  them  only 
at  the  rate  of  P  1.63.  The  situation  gave  rise  to  many  dis- 
putes, with  the  result  that  a  military  order  (General  Order 
No.  76)  was  issued  June  10,  1899,  forbidding  under  a  heavy 
penalty  any  person  who  did  an  exchange  business  in 
Porto  Rico  to  make  different  rates  of  exchange  for  differ- 
ent kinds  of  United  States  currency. 


CHAPTER  III 
FORMULATION  OF  A  PERMANENT  GOLD  STANDARD  PLAN 

PRESIDENT  McKiNLEY's  order  of  January  1899  was  to 
provide  merely  a  temporary  modus  operand*  until  a  perma- 
nent solution  of  the  currency  problem  could  be  worked  out. 
There  was  practical  unanimity  among  those  familiar  with 
the  situation  that  the  existing  Porto  Rican  currency  system 
must  go.  A  " managed"  currency  system,  with  a  fiduciary 
unit  of  value  out  of  harmony  with  the  gold  units  of  inter- 
national trade,  and  with  the  money  supply  arbitrarily  regu- 
lated by  government  instead  of  automatically  responding 
to  trade  demands,  was  clearly  an  anomaly  for  a  colony 
possessing  less  than  a  million  population.  President 
McKinley's  order  of  January  i,  1899  had  virtually  estab- 
lished a  temporary  gold  standard  in  Porto  Rico,  and  the 
advisability  of  placing  the  Island  permanently  upon  the 
gold  standard  was  not  seriously  questioned.  One  may  go 
still  farther  and  say  that  those  who  studied  the  problem 
were  nearly  unanimous  in  the  judgment  that  in  view  of  the 
size  of  the  Colony,  and  its  proximity  to  the  United  States, 
sooner  or  later  the  United  States  currency  system,  either 
complete  or  in  a  modified  form,  should  be  introduced 
into  the  Island.  The  differences  of  opinion  were  concerned 
chiefly  with  (i)  the  rate  at  which  the  Porto  Rican  currency 
should  be  converted  into  American  currency,  and  (2)  the 
manner  of  the  conversion  and  the  length  of  time  that  should 
be  used  to  effect  it. 

The  Rate  of  Conversion 

The  rate  of  conversion  was  considered  important  for  two 
reasons :  (i)  its  effect  upon  the  holders  of  Porto  Rican 

178 


FORMULATION  OF  GOLD  STANDARD  PLAN     179 

currency,  who  would  be  required  to  exchange  it  for  United 
States  currency;  (2)  its  effect  upon  the  equities  existing 
between  debtors  and  creditors,  who  would  be  required  to 
adjust  their  outstanding  contracts  to  the  new  currency 
basis. 

Holders  of  Porto  Rican  Currency.  The  more  obvious 
but  less  important  of  these  effects  was  the  direct  one  upon 
the  holders  of  Porto  Rican  currency.  As  we  have  seen,1 
the  total  amount  of  Porto  Rican  currency  circulating  in 
the  Island  was  about  P  7, 3 50,000  (including  an  estimated 
Pi, 500,000  bank  notes  of  the  Spanish  Bank  of  Porto 
Rico).  This  money  was  scattered  among  approximately  a 
million  persons,  the  great  bulk  of  whom,  being  poor  people, 
held  but  small  sums.  According  to  the  Military  Governor, 
General  Davis,  there  was  in  the  vaults  of  local  banks  on 
August  10,  1899  P  2,691, 500  in  silver.2  The  wealthier 
classes  held  but  little  actual  money,  except  the  few  who  had 
been  hoarding  pesos  as  a  speculation  in  the  expectation 
that  the  Government  would  redeem  them  at  favorable 
rates.3  The  man  with  the  hoard  naturally  wanted  a  high 
gold  rate  of  conversion.  The  small  farmers,  jibaros,  as 
they  were  called,  and  farm  laborers,  who  represented  about 
three  fifths  of  the  Porto  Rican  population,  had  but  little 
cash.  The  jibaro  lived  on  credit,4  and  when  he  received 
cash  for  his  crop  or  as  wages,  he  spent  it  quickly.  The 
farm  laborer,  who  received  his  wages  in  cash,  usually  weekly, 
lived  from  hand  to  mouth  and  rarely  had  much  cash.  It 
was  toward  the  coast  towns  that  the  money  when  paid  out 
in  the  country  rapidly  drifted  for  the  purchase  of  supplies, 
and,  except  at  certain  short  periods  of  the  year  when  settle- 
ments were  being  made  in  the  interior,  the  great  bulk  of  the 
currency  was  to  be  found  in  the  coast  cities.  To  the  masses 
of  people  in  these  cities,  with  their  small  holdings  of  cash,  a 
low  United  States  currency  rate  was  naturally  objectionable 

1  Supra,  p.  165.  8  Cf.  Carroll,  pp.  496-97. 

2  Ann.  Rep.,  1899,  p.  506.  4  Ibid.,  p.  458. 


l8o     THE  PORTO  RICAN   CURRENCY  REFORM  OF   1899-1900 

because  it  would  give  them  "less  money."  For  example, 
to  exchange  P  6  for  United  States  currency  at  par  would 
give  them  $6;  at  75  cents,  would  give  them  $4.50;  and  at 
60  cents,  only  $3.60.  Any  rate  below  par  was  likely  to  be 
looked  upon  by  the  laboring  classes  and  farmers  as  unfair 
because  it  required  them  "  to  give  up  more  money  than  they 
got  back."  This  was  as  far  as  their  reasoning  went.  As 
will  be  seen  later,1  it  contained  no  small  element  of  truth. 

The  exchange  of  one's  Porto  Rican  cash  holdings  for 
United  States  currency,  however,  would  have  been  but  a 
momentary  matter;  and,  as  the  amounts  held  by  most 
people  were  small,  this  phase  of  the  problem  of  selecting  a 
fair  rate  was  not  a  very  serious  one. 

The  Rate  of  Conversion  and  Debts.  The  problem  was 
much  larger  than  merely  redeeming  a  few  millions  of 
" counters"  used  in  cash  transactions.  The  controversy 
over  the  rate  of  conversion  centered  chiefly  in  the  question 
of  justice  in  the  settlement  of  outstanding  private  2  debts 
incurred  in  Porto  Rican  currency.  It  involved  the  ad- 
justment of  the  standard  of  deferred  payments,  upon  which 
millions  of  pesos  of  outstanding  contracts  were  based,  and 
the  entire  reorganization  of  a  delicately  adjusted  system  of 
prices  and  wages  permeated  by  long-established  prejudices 
and  customs,  and  this  in  a  country  where  73  per  cent  of  the 
male  population  twenty-one  years  of  age  and  over  could 
neither  read  nor  write. 

Porto  Rico,  like  most  Spanish  tropical  colonies,  was  a 
land  of  manana  (to-morrow) ;  people  did  not  pay  cash  if 
they  could  buy  on  credit,  and  the  credit  period  was  often 
long,  being  punctuated  by  several  renewal  dates.  Porto 
Rico  was  preeminently  an  agricultural  country.  In  1900 

1  Infra,  pp.  217-19. 

2  Porto  Rico  had  no  insular  public  debt,  and  the  entire  debt  of  the  munic- 
ipalities the   Military  Governor  estimated  at  only  P  1,500,000,  of  which 
about  one  half  was  secured  by  productive  public  works.    Hearings  before 
the  Senate  Committee  on  Pacific  Islands  and  Porto  Rico,  $6th  Congress,  ist 
Session,  Miscellaneous  Documents,  EX,  No.  147,  pp.  41  and  62. 


FORMULATION  OF   GOLD   STANDARD   PLAN  181 

nearly  three  fourths  of  the  male  bread  winners  were  en- 
gaged in  agriculture.1  It  was,  moreover,  a  land  of  small 
farms.  Although  having  an  area  of  but  3,606  square  miles, 
or  less  than  half  (about  44  per  cent)  that  of  New  Jersey,  it 
had  in  1899  39,021  farms  as  compared  with  New  Jersey's 
34,650  in  1900,  representing  an  average  cultivated  area  per 
farm  of  about  12-^  acres 2  as  compared  with  57  acres  in  New 
Jersey.  The  Porto  Rican  farmer  very  frequently  bought 
his  supplies  of  the  local  storekeeper  on  long-time  credit, 
running  from  six  months  to  a  year  and  sometimes  longer, 
and  often  settled  his  accounts  at  the  crop-harvesting  period 
by  turning  over  to  the  storekeeper  his  crops;  the  store- 
keeper in  turn  had  bought  his  supplies  from  the  large  im- 
port and  export  merchants  on  long-time  credit  and  settled 
by  turning  over  to  them  the  produce  he  received  from  the 
farmer 3  —  much  as  is  the  custom  in  some  of  the  cotton 
districts  in  our  Southern  states.  Many  of  these  merchants 
in  turn  had  bought  their  European  supplies  on  long  credit 
of  six  to  nine  months  from  the  United  Kingdom,  Germany, 
France,  and  Spain; 4  and  "these  European  credits  enabled 
many  merchants  to  help  planters  to  settle  their  accounts 
during  crop  time  binding  themselves  by  mortgages  on  their 
plantations."  5 

As  to  the  amount  of  these  various  kinds  of  obligations 
outstanding  in  1899  there  exist  no  reliable  statistics.  There 
were  certain  statistics  of  city  and  country  mortgage  loans 
recorded  for  the  period  1880-90,  classified  according  to 

1  Census  of  Porto  Rico,  1899,  p.  96. 

2  Ibid.,  p.  352. 

»  Cf.  Carroll,  p.  458. 

4  Commissioner  Porter,  in  his  Report  on  the  Currency  Question  of  Porto 
Rico  (p.  4),  in  1899,  quotes  one  of  the  leading  import  and  export  merchants 
of  Porto  Rico  as  saying :  "The  sales  are  chiefly  made  in  Porto  Rico  on  from 
six  months  to  twelve  months'  time,  but  the  payment  is  frequently  extended 
to  a  much  longer  time  and  postponed  from  one  year  to  the  other ;  and  all 
these  pending  debts  are  contracted  in  Porto  Rican  currency,  too." 

6  Report  of  British  Vice  Consul  of  Ponce,  Porto  Rico,  1900,  p.  n,  in 
British  Diplomatic  and  Consular  Reports,  1900. 


182     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

the  rates  of  interest  charged,  but  these  figures  are  incomplete 
and  give  no  information  as  to  the  amount  of  mortgage  loans 
outstanding  in  1899.*  The  estimates  made  by  the  best-in- 
formed persons  placed  the  total  amount  of  such  obligations, 
outstanding  in  1899,  at  from  thirty  to  fifty  million  pesos. 
The  representative  of  one  banking,  importing,  and  export- 
ing house,  which  Commissioner  Porter  in  1899  characterized 
as  "the  largest  and  strongest  house  in  the  whole  Island,"  2 
said: 

"  There  appear  to  be  on  the  Island  from  P  20,000,000  to 
P  2 5, 000,000  of  mortgage  debts  on  real  estate  and  land 
property  —  debts  which  have  been  contracted  in  the  course 
of,  let  us  say,  the  last  ten  years,  and  which  extend,  in  many 
instances  over  still  many  years  to  come.  The  commercial 
life  being  very  active  on  the  Island,  and  being  based  prin- 
cipally on  credit,  even  on  long  credit,  it  may  be  safely  sup- 
posed that  there  is  another  P  2 5, 000,000  of  pending  com- 
mercial debts  (perhaps  even  more)  —  debts  which  are 
not  guaranteed  by  mortgages  and  which  extend  over  one 
to  two  years." 3 

The  Subgovernor  of  the  Spanish  Bank  of  Porto  Rico  es- 
timated the  mortgages  and  private  indebtedness  to  amount 
to  from  P  16,000,000  to  P  18,000,000  in  the  fall  of  1898, 
and  "acceptances,  drafts,  and  other  unpaid  mercantile 
transactions"  to  reach  P 20, 000,000  or  P 2 5, 000,000;  to- 
gether aggregating  P  36, 000,000  to  P  43,000,000. 4  In 
October  1899  the  Board  of  Directors  of  the  Territorial  and 
Agricultural  Bank  of  Porto  Rico  estimated  that  there  were 
"perhaps  P 30,000,000  of  debts,  mortgages,  etc.,  which 
have  been  contracted  within  the  last  ten  years.  .  .  ."  5  A 

1  The  figures  showed  for  1880-90  mortgage  loans  on  country  property 
recorded  to  the  number  of  4,564,  representing  P  26,108,286,  and  on  city  prop- 
erty to  the  number  of  1,267  representing  P  4,938,5  24.     Figures  are  tabu- 
lated in  Cong.  Rec.,  March  22, 1900,  p.  3173.    Cf.  also  infra,  p.  189,  note  4. 

2  Porter,  p.  4.  4  Cf.  Carroll,  p.  470. 

3  Ibid.  *  Ibid.,  p.  489. 


FORMULATION  OF  GOLD   STANDARD   PLAN  183 

representative  of  an  important  German  banking  firm  of 
San  Juan,  in  October  1898,  estimated  the  unliquidated 
obligations  between  debtor  and  creditor  as  certainly 
not  less  in  amount  than  P  30,000,000  nor  more  than 
P  5o,ooo,ooo.1  In  the  absence  of  reliable  data,  this  last 
estimate  may  be  accepted  as  an  intelligent  guess. 

These  debts  had  been  running  for  widely  different  periods 
of  time  and  had  greatly  varied  maturities.  Said  the  Sub- 
governor  of  the  Spanish  Bank  of  Porto  Rico  : 

"Our  statutes  allow  us  to  advance  money  for  terms  of  six 
months,  but  we  have  limited  loans  and  discounts  to  a  period 
of  three  months  during  these  abnormal  times.  .  .  .  Mer- 
cantile credits  for  goods  have  been  given  for  periods  of  as 
long  as  two  years.  Some  private  loans  on  mortgage  will 
not  fall  due  for  four,  six,  and  even  ten  years.  The  Hypothe- 
cary  Bank  has  loans  which  will  not  mature  for  ten,  fifteen, 
and  twenty  years."  2 

This  statement  was  made  in  October  1898,  in  which  month 
the  gold  value  of  the  peso  varied  from  53  cents  to  57  cents  ; 
three  months  before  (i.e.,  July  1898)  it  varied  from  40  cents 
to  45  cents  ;  a  year  before  (i.e.,  October  1897)  it  varied  from 
57  cents  to  58  cents;  two  years  before  from  6o|  cents  to 
62^  cents  ;  and  eight  years  before  the  equivalent  of  the  pre- 
vailing rate  was  86  cents.  If  one  assumes,  as  every  one  did 
in  discussing  the  Porto  Rican  currency  problem,  that  gold 
was  stable  in  value  during  that  period,  then  obviously  the 
justice  or  injustice  of  any  particular  rate  of  conversion  would 
depend  upon  the  gold  value  of  the  peso  when  the  debt 
was  contracted.3  For  debts  contracted  in  October  1890, 


p.  477. 

2  Ibid.,  p.  476. 

8  This  would  not  be  true  if  it  could  be  shown,  as  it  probably  could  not  for 
Porto  Rico,  that  a  future  depreciation  or  appreciation  in  the  gold  value  of 
the  peso  was  anticipated,  and  to  some  extent  consciously  or  unconsciously 
allowed  for  in  a  higher  or  lower  interest  rate.  In  such  a  contingency  the  gold 
value  of  the  peso  at  the  date  of  the  debt's  maturity  would  be  one  of  the 
determining  factors. 


184     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1800 

when  the  peso  was  worth  about  86  cents  gold,  a  gold  rate 
of  86  cents  might  be  considered  reasonable ;  for  debts  con- 
tracted in  October  1893,  similarly  a  rate  of  conversion  of 
75  cents;  for  debts  contracted  in  October  1897,  a  rate  of 
57^  cents;  and  for  debts  contracted  in  July  1898,  a  rate 
of  42!  cents. 

There  were  those  who  advocated  just  such  a  plan  of 
variable  rates  of  conversion  for  the  adjustment  of  debts, 
based  upon  the  gold  value  of  the  peso  at  the  dates  when  the 
respective  debts  were  contracted.  This  plan,  however, 
was  too  complicated  and  difficult  of  administration  to  re- 
ceive serious  consideration.  Moreover,  the  plan  was  un- 
sound in  principle,  for  any  such  adjustment  on  the  basis 
of  the  value  of  the  peso  at  the  time  debts  were  incurred 
should  have  measured  that  value  by  its  purchasing  power 
in  Porto  Rico,  that  is,  by  comprehensive  index  numbers  of 
Porto  Rican  prices  and  wages,  not  by  variations  in  gold  ex- 
change rates.  During  the  period  1890-99,  exclusive  of  the 
brief  period  of  the  Spanish  War,  the  gold  standard  had  prob- 
ably been  almost  if  not  quite  as  unstable  in  value  as  had  the 
Porto  Rican  fiduciary  standard.  From  1890  to  1896  gold 
was  appreciating  the  world  over  in  terms  of  commodities, 
while  Porto  Rican  currency  was  depreciating  in  terms  of 
gold.  Unfortunately,  the  purchasing  power  of  the  peso 
in  Porto  Rico  for  this  period  cannot  be  measured,  as  there 
are  no  index  numbers  of  Porto  Rican  prices ;  and  sufficient 
price  data  are  not  available  to  construct  such  an  index 
number  of  any  value. 

Inasmuch  as  the  only  workable  plan  seemed  to  be  to 
adopt  some  definite  gold  value  as  the  legal  rate  of  conver- 
sion for  all  outstanding  debts,  there  naturally  arose  a  con- 
troversy as  to  whether  that  rate  should  be  a  high  gold  rate 
or  a  low  one.  Creditors  as  a  class,  including  merchants 
and  bankers,  favored  a  high  gold  rate ;  debtors,  consisting 
chiefly  of  the  agricultural  population,  favored  a  low  gold 
rate.  And  on  this  subject  class  feeling  in  Porto  Rico  ran 


FORMULATION  OF  GOLD  STANDARD  PLAN  185 

high.  The  Government,  through  special  commissioner 
Henry  K.  Carroll,  received  a  considerable  amount  of  verbal 
and  written  testimony  on  both  sides  of  the  controversy.1 


Advocates  of  a  High  Rate  of  Conversion 

A  few  went  so  far  as  to  advocate  conversion  at  par, 
namely,  a  United  States  dollar  for  each  peso.  Some  of 
these  took  the  position  that  intrinsically  the  Porto  Rican 
peso  was  the  same  as  the  Spanish  five-peseta  piece,  the  chief 
difference  being  the  words  " Puerto  Rico"  instead  of 
"Espafia"  on  the  coin ;  and  they  claimed  that  being  intrin- 
sically the  same  it  should  be  redeemed  at  the  gold  value  of 
the  Spanish  five-peseta  piece,  which  they  assumed  to  be 
equal  to  that  of  the  United  States  dollar,  overlooking  the 
fact  that  Spanish  silver  was  at  that  time  (say  June  22,  1899) 
at  a  discount  of  about  17  per  cent  in  Spanish  gold,  and  that 
five  pesetas  of  Spanish  gold  were  the  equivalent  of  only 
96^  cents  United  States  gold.  The  Board  of  Directors  of 
the  Territorial  and  Agricultural  Bank  issued  a  statement  in 
October  1899,  favoring  a  high  gold  rate  of  conversion,  and 
apparently  hinting  that  the  fact  that  Spain  in  1895  ex- 
pressed a  desire  ultimately  to  bring  the  Porto  Rican  peso 
into  parity  with  the  Spanish  duro  2  placed  a  moral  obliga- 
tion upon  the  United  States  to  convert  the  Porto  Rican 
pesos  at  a  high  gold  rate.  The  statement  began : 

"When  the  Spanish  Government  fixed  the  value  of  the 
Mexican  dollar  in  relation  to  that  of  the  national  money  of 
Spain  and  changed  it  for  the  provincial  peso,  it  incurred  the 
obligation  under  the  decree  of  1895  of  assimilating  later  on 
the  colonial  currency  into  the  national  currency.  This 
obligation,  made  in  good  faith,  could  not  have  been  avoided. 
In  virtue  of  this  assimilation  it  would  have  been  possible 
at  any  time  to  convert  the  colonial  currency  into  gold  at  a 
premium  of  25  per  cent  or  30  per  cent  under  normal  circum- 

1  Carroll,  pp.  453~95-  2Cf.  supra,  pp.  161-62. 


1 86     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

stances,  and  this  was  the  original  and  natural  solution  of 
our  monetary  problem,  to  be  given  effect  later  on."  1 

Others  advocated  conversion  at  par  from  the  standpoint 
of  expediency,  considering  the  par  rate  the  simplest  one 
to  put  in  effect  and  the  one  least  disturbing  to  the  business 
of  the  Island.2 

An  influential  group  favored  a  75-cent  gold  rate  (i.e. 
P  1.33!  to  $i).  This  group  included  the  Spanish  Bank 
of  Porto  Rico3  and  the  Board  of  Agriculture,  Manufacture, 
and  Commerce  of  Porto  Rico.4  Another  rate  which  had 
many  advocates  was  66f  cents  (i.e.  P  1.50  to  $i).  This 
rate  was  favored  by  several  of  the  leading  bankers  5  and 
by  substantial  gatherings  of  merchants,  agriculturists,  and 
others  in  Ponce 6  and  Mayagiiez.7  Those  advocating 
these  high  gold  rates  usually  based  their  arguments  on 
average  rates  of  exchange  for  considerable  periods  of 
years,  ignoring  as  abnormal  and  largely  nominal  the  low 
gold  valuations  expressed  in  the  exchange  rates  prevailing 
during  the  Spanish- American  War  period.8  They  also 
placed  considerable  emphasis  upon  the  (alleged)  danger  of 
interfering  with  the  economic  development  and  prosperity 
of  the  Island  by  impairing  capital  values  through  conver- 
sion at  too  low  a  gold  rate.9 

1  Carroll,  p.  489- 

2  On  this  subject  see  correspondence  with  A.  M.  Seixas  and  others,  part 
of  which  is  printed  in  Porter's  Report  on  the  Currency  Question  of  Porto 
Rico,  pp.  13-15. 

8  Carroll,  p.  474. 
4  Ibid.,  p.  488. 
6Cf.  Porter,  p.  12. 

6  CarroU,  p.  481. 

7  Ibid.,  p.  480-81. 

8  Cf.  ibid.,  pp.  473-74,  and  477. 

9  On  this  subject  the  Subgovernor  of  the  Spanish  Bank  of  Porto  Rico 
said  (Carroll,  pp.  473-74) :  "Our  stock  of  circulating  medium  is  extremely 
small  and  .  .  .  after  the  blow  received  when  the  Mexican  coin  was  taken 
out  of  circulation  at  a  discount  of  5  per  cent,  for  which  the  country  has 
never  seen  any  return,  the  country  cannot  see  with  indifference  another 
change  nor  suffer  another  and  more  serious  mutilation  of  the  capital  in 


FORMULATION  OF  GOLD  STANDARD  PLAN  187 

Advocates  of  a  Low  Rate  of  Conversion 

Of  those  favoring  a  low  gold  rate  of  conversion  the  ex- 
tremists advocated  conversion  at  bullion  value,  which  would 
have  been  in  the  neighborhood  of  44  or  45  cents  (cf.  chart 
on  page  167).  Representative  of  their  position  is  the 
following  argument  advanced  by  a  man  who  had  been 
engaged  in  mercantile  pursuits  in  the  Island  for  many 
years : 

"  The  mainstay  of  this  Island  is  its  agriculture,  sugar, 
coffee,  tobacco,  and  cattle ;  and  if  a  personal  canvass  were 
taken,  you  would  find  them  (i.e.  the  farmers)  as  a  class  op- 
posed to  the  absurd  propositions  of  half  a  dozen  banks, 
money  brokers,  and  exchange  and  wholesale  merchants 
regarding  the  change  of  our  Porto  Rico  dollars. 

"  These  parties,  the  holders  of  the  Porto  Rico  dollars, 
are  not  petitioning  for  the  public  good,  but  for  their  sole 
personal  benefit,  and  there  is  as  much  reason  to  change 
dollar  for  dollar  as  to  change,  as  they  desire,  at  85  cents  gold 
for  each  Porto  Rico  dollar,  or  70  cents  gold,  or  for  any  other 
rate  that  is  not  for  its  intrinsic  value.  Their  wish  is  that 
the  difference  between  the  intrinsic  value  and  85  cents  .  .  . 
should  be  paid  by  a  tax  to  be  levied  on  the  Island.  For 
what  reason  should  the  Island  be  taxed  in  order  that  two  or 
three  dozen  men  or  mercantile  firms  who  hold  the  Porto 
Rico  dollars  should  be  enriched  ?  .  .  . 

"For  months  before  the  United  States  army  arrived  in 
Porto  Rico  exchange  on  New  York  was  from  100  per  cent  to 

circulation.  For  this  reason  ...  if  in  the  exchange  our  money  were  re- 
ceived at  too  low  a  value,  capital  would  receive  a  heavy  blow,  and  although 
for  the  moment  debtors  would  appear  to  be  favored  in  proportion,  this 
would  be  imaginary  only  —  simply  the  contraction  of  capital  —  and  lenders 
would  no  longer  be  able  to  continue  loaning  to  agriculturists  or  business 
men  to  anything  like  the  extent  they  had  formerly  done.  .  .  .  For  these 
and  other  considerations  this  bank  [The  Spanish  Bank  of  Porto  Rico]  con- 
siders that  the  valuation  of  our  peso  at  75  cents  American  gold,  which  is 
equivalent  to  a  premium  of  33$  per  cent,  is  a  rate  harmonious  to  both 
interests,  and  will  be  found  conciliatory  to  the  different  elements  of  our 
economical  local  life." 


1 88     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

150  per  cent  premium  [representing  a  gold  value  to  the  peso 
of  from  50  cents  to  40  cents].  The  sugar,  coffee,  tobacco, 
and  cattle  dealers,  and,  in  fact,  the  whole  Island,  bought 
their  supplies  on  credit  from  the  merchants  at  prices  which 
covered  these  rates  of  exchange ;  and  now  that  the  coffee 
and  sugar  crop  is  coming  in,  the  merchants,  brokers,  and 
banks  have  combined  to  depreciate  exchange  and  get  it 
down  to  as  low  a  point  as  possible,  so  as  to  get  back  from 
all  these  planters  their  money  which  they  had  put  out 
at  100  per  cent  to  150  per  cent.  .  .  . 

"The  greater  part  of  the  taxpayers  in  this  Island  are 
the  agriculturists,  and  it  would  be  an  outrage  to  change 
Porto  Rico  dollars  at  85  cents  or  70  cents  United  States 
currency  and  charge  the  loss  to  the  Island  budget,  as  it 
would,  in  fact,  make  the  agriculturist,  who  has  paid  or 
bought  his  goods  at  150  per  cent,  pay  again  the  difference 
of  those  dollars  from  their  intrinsic  value  to  85  cents  or 
70  cents  United  States  currency."1 

The  suggestion  of  forcibly  redeeming  at  bullion  value 
fiduciary  coins  that  had  circulated  for  at  least  eight  years 
at  values  far  above  their  bullion  value,  except  for  a  brief 
period  of  panic  resulting  from  war  when  little  business  was 
done  and  when  prices  were  largely  nominal,  would  not  be 
worthy  of  attention  here,  were  it  not  for  the  fact  that  the 
proposal  had  substantial  backing  in  Porto  Rico,  and  that 
the  belief  that  the  United  States  intended  to  convert  at 
bullion  value  became  widespread  in  the  Island  —  so  wide- 
spread in  fact  that  a  flood  of  protests  against  such  action 
was  sent  to  Washington.2  From  the  standpoint  of  economic 
justice  it  is  difficult  to  see  any  relationship  whatever  between 
the  bullion  value  of  the  peso  and  the  fair  money  value  at 
which  the  peso  should  have  been  converted  into  United 
States  currency. 

Of  the  low  gold  rates  advocated,  the  one  most  frequently 

1  Carroll,  pp.  481-82. 

2  Cf.  J.  D.  Whelpley,  The  Currency  of  Porto  Rico,  in  Forum,  27  (1899), 
p.  569. 


FORMULATION  OF  GOLD  STANDARD  PLAN 


189 


urged  in  Porto  Rico  was  the  5o-cent  rate,  or  "2  to  i."1 
Those  who  advocated  it,  however,  generally  spoke  of  it 
as  the  rate  representing  the  middle  ground  between  a  rate 
based  on  bullion  value  and  one  based  on  the  high  exchange 
value  prevailing  before  the  war.2  It  was  the  rate  most 
commonly  favored  by  the  agricultural  classes.  In  its  favor, 
as  in  favor  of  other  low  gold  rates  suggested,  such  as  the 
bullion  rate,  57  cents  (Pi. 75  to  $i),  and  55^  cents  (Pi.So 
to  $i),  the  principal  arguments  advanced  were:  (i)  The 
one  previously  quoted,3  that  during  the  war  period  just 
passed,  farmers  had  been  compelled  to  sell  their  produce 
for  pesos  of  a  low  gold  value,  to  buy  supplies  at  high  war 
prices,  and  in  borrowing  money  of  banks  and  merchants 
had  received  pesos  of  a  low  gold  value.  Why,  it  was  asked, 
should  they  now  be  forced  to  pay  their  creditors  in  money 
which  had  been  arbitrarily  raised  in  value?  (2)  The  claim 
that  the  agricultural  classes  —  the  "really  productive" 
classes  of  the  Island  —  had  been  oppressed  for  years  by  the 
banking  and  mercantile  classes.  Much  was  made  of  the 
high  interest  rates  that  had  been  exacted  of  the  farmers.4 

1  Carroll,  pp.  458. 

2  Cf.  ibid.,  pp.  480  and  482. 
8  Supra,  p.  1 87-88. 

4  The  table  of  mortgages  on  country  and  city  property  in  Porto  Rico  for 
the  period  1880-98  (previously  mentioned,  p.  182,  note  i)  submitted  by 
Governor  Davis  may  be  summarized  as  follows  as  regards  interest  rates : 


No.  OF  LOANS 

AMOUNT 

INT.  RATE 

Country  Property 

City  Property 

Country  Property 

City  Property 

P   000 

P   000 

No  interest 

2,225 

582 

TO,  1  68 

1,036 

1-6% 

130 

39 

1,326 

584 

6-12% 

1,173 

329 

9,825 

1,998 

12-18% 

841 

260 

3,904 

1,034 

18-24% 

I63 

S3 

756 

1,266 

•4  + 

13 

4 

130 

20 

Cong.  Rec.,  Mar.  22,  1900,  p.  3173. 


1 90     THE  PORTO  RICAN   CURRENCY  REFORM  OF   1899-1900 

It  appears  from  the  testimony  that  the  banks  normally 
charged  on  mortgage  loans  from  7^  to  9  per  cent,  and 
merchants  and  private  money  lenders  charged  from  9  to 
24  per  cent,  12  and  15  per  cent  being  common  rates.  The 
Subgovernor  of  the  Spanish  Bank  of  Porto  Rico  testified : 

"  As  regards  rates  of  interest  formerly  prevailing,  when  this 
bank  took  over  the  business  of  its  predecessors  several  years 
ago,  the  rate  was  12  per  cent  minimum  and  18  per  cent 
maximum  per  annum.  This  rate  lasted  until  1878,  but 
even  now  is  frequent  among  private  money  lenders.  Our 
official  rate  is  now  from  8  per  cent  to  9  per  cent  annually 
and  private  bankers  rates  from  9  per  cent  to  10  per  cent." 1 

A  member  of  the  municipal  council  of  Arecibo  testified  : 

"  The  agricultural  interests  are  in  a  very  precarious  state. 
Most  of  them  are  under  mortgage  to  merchants,  who  are 
not  satisfied  with  collecting  a  heavy  rate  of  interest  —  at 
least  from  12  to  15  per  cent  per  annum  —  but  stipulate  in 
their  mortgages  that  the  owner  of  the  estate  shall  sell  to 
the  money  lender  his  produce  at  a  price  which  is  usually 
below  the  market  price." 2 

The  British  Consul  reported  in  1900  that  planters'  mort- 
gages to  the  estimated  value  of  P  30,000,000  were  held  for 
the  greater  part  by  merchants  and  bankers  at  rates  of  in- 
terest from  24  per  cent  down  to  12  per  cent.3 

Bankers  and  other  money  lenders  met  these  criticisms 
by  claiming  that  high  interest  rates  were  nothing  like  so 
common  as  the  agriculturists  maintained,  and  that,  when 
they  did  exist,  they  were  usually  justified  by  the  large  risks 
involved. 

Another  argument  advanced  in  favor  of  a  low  gold  rate 
of  conversion  was  that  of  the  danger  of  smuggling  —  a 
danger  to  be  considered  later  in  another  connection.4  The 

1  Carroll,  p.  476. 

2  Carroll,  p.  502. 

3  British  Diplomatic  and  Consular  Reports,  1899,  Porto  Rico,  p.  9. 

4  Infra,  p.  197. 


FORMULATION  OF  GOLD  STANDARD  PLAN  191 

dies  from  which  the  Porto  Rican  coins  were  made  were  said 
still  to  exist  in  Spain,  and  it  was  argued  that  from  these 
dies  and  possibly  also  from  others  that  would  be  made  for 
the  purpose,  a  flood  of  counterfeit  coins  would  come  to  Porto 
Rico  to  be  exchanged  for  United  States  currency,  should  a 
rate  of  conversion  much  above  bullion  value  be  adopted.1 
A  6o-cent  gold  rate  would  give  a  profit  on  counterfeiting 
of  35  to  40  per  cent,  even  if  the  counterfeits  were  full 
weight  and  of  legal  fineness.  This  danger  seemed  the 
more  threatening  because  of  the  Island's  recent  experience 
with  regard  to  the  illicit  importation  of  Mexican  pesos.2 

Sixty-Cent  Rate  Adopted 

The  authorities,  after  hearing  these  arguments  in  favor  of 
the  various  rates  of  conversion,  decided  to  adopt  the  official 
rate  which  had  prevailed  since  the  order  of  President 
McKinley  of  January  i,  1899,  i.e.  the  rate  of  60  cents  gold 
to  the  peso,  or  Pi.66f  to  $i.  This  was  the  rate  recom- 
mended by  Commissioner  Porter  in  his  Report  of  January 
3,  i899,3  and  one  to  which  the  public  had  been  accustomed 
for  some  time.  Leaving  out  of  account  the  war  period, 
April  to  October  1898,  which  was  entirely  abnormal,4  this 
rate  was  almost  exactly  the  average  for  the  five-year  period 
1895  to  J^99  inclusive.  For  different  periods  the  average  5 
rates  were  as  follows : 

1  Cf.  Carroll,  p.  482. 

2  Supra,  pp.  158-59. 

3  Page  6. 

4 The  rates  which  ruled  for  the  time  of  the  war  "were  panic  or  war 
rates.  .  .  .  When  the  war  broke  out  nobody  wanted  to  draw  and  every- 
body wanted  to  buy  bills;  nobody  knew  what  would  become  of  Porto 
Rico.  ...  As  soon  as  it  became  certain  that  Porto  Rico  would  be  an 
American  country  the  rates  of  exchange  went  rapidly  down.  .  .  ."  H.  C. 
Fritze,  quoted  by  Commissioner  Porter,  Report,  p.  4. 

B  That  is,  the  average  of  the  monthly  high  and  low  rates  1896-99,  and 
of  the  prevailing  monthly  rates  1890-95,  as  plotted  on  the  charts  on  pages 
158  and  167. 


192     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

PERK>D  AVERAGE  RATE 

1890-99 65.1  cents 

1890-99  (exclusive  of  war  period  April  to  Oct.  1898)  .  66.7  cents 

1894-99 59.5  cents 

1895-99 58.7  cents 

1895-99    •  (exclusive  of  war  period) 60.3  cents 

1896-99 58.6  cents 

1896-99    .  (exclusive  of  war  period) 60.4  cents 

i896-March  1898 60.7  cents 

1898-99 56.0  cents 

From  the  above  it  will  be  seen  that  whether  one  takes  the 
average  rate  for  the  six-year  period  1894-99;  the  five- 
year  period  1895-99;  or  the  four-year  period  1896-99,  ex- 
clusive of  the  war  period  or  inclusive  of  it ;  or  the  two  and 
one  fourth-year  period  from  January  1896  to  March  1898; 
he  obtains  approximately  the  same  result,  that  is  a  rate 
very  close  to  60  cents.  A  ten-year  average  gives  a  higher 
rate  (65.1  cents),  while  a  two-year  average  gives  a  lower 
rate  (56.0  cents).  From  the  standpoint  of  the  effect  of  the 
rate  chosen  upon  the  conflicting  interests  of  debtors  and 
creditors  the  two-year  average  of  56  cents  undoubtedly 
would  have  given  too  much  weight  to  the  war  period,  and 
have  underestimated  the  importance  of  debts  of  long  stand- 
ing; while  the  ten-year  average  (65  cents)  gave  debts  of 
long  standing  too  much  emphasis,  since  no  one  questioned 
the  fact  that  the  great  bulk  of  the  outstanding  obligations 
did  not  extend  back  farther  than  five  years. 

The  6o-cent  rate  had  two  other  advantages.  It  was  an  in- 
tegral decimal  rate,  and  therefore  could  be  easily  calculated 
and  expressed,1  and  it  stood  between  the  extremes  advo- 
cated and  fairly  distant  from  both. 

In  the  Philippines  and  India,  countries  which  live  largely 
upon  their  own  produce,  and  in  which  import  and  export 
trade  therefore  is  of  relatively  small  importance  as  com- 
pared with  domestic  trade,  the  connection  between  price 

1  The  peso  at  this  valuation  in  terms  of  American  cents  was  very 
conveniently  divisible,  for  the  figure  60  can  be  divided  integrally  by  2,  3, 
4,  5,  6,  10,  12,  15,  30  and  60. 


FORMULATION  OF  GOLD   STANDARD   PLAN  193 

level  and  short-time  fluctuations  in  gold  exchange  rates  is 
rather  remote.  Most  of  the  items  in  the  daily  budgets  of 
the  masses  are  chiefly  local  matters  and  have  only  a  distant 
relation  to  gold  prices  abroad  and  to  foreign  exchange  rates.1 
This  was  not  true  in  Porto  Rico.  There  the  native's  sup- 
plies—  his  rice,  his  corn,  and  his  clothing  —  were  largely 
imported ;  while  the  products  of  the  country  —  the  sugar, 
coffee,  tobacco,  fruits,  etc.  —  were  largely  exported.2  The 
result  was  that  local  wholesale  prices  were  tied  up  closely 
to  foreign  prices  and  to  foreign  exchange  rates,  and  con- 
sequently followed  more  closely  the  ups  and  downs  of  ex- 
change than  in  most  other  countries.  The  average  gold 
exchange  value  of  the  peso,  in  Porto  Rico,  therefore,  was 
probably  a  better  criterion  of  the  peso's  purchasing  power 
than  it  would  have  been  in  most  countries. 


How  Should  the  Transition  to  the  New  Currency  Basis  be 

Ejected? 

In  addition  to  the  rate  of  conversion,  two  other  matters 
relating  to  the  reform  received  attention.  The  first  was 
the  question  as  to  whether  the  transition  to  the  United 
States  currency  basis  should  be  effected  quickly  or  slowly ; 
and  the  second,  whether  an  American  coin  corresponding 
to  the  Porto  Rican  peso  should  be  coined  and  circulated,  in 
order  to  bridge  over  the  transition 3  with  the  least  possible 
disturbance.  On  both  of  these  subjects  the  opinion  of  the 
authorities  appears  to  have  shifted  between  1898  and  the 
spring  of  1900. 

Secretary  of  the  Treasury  Gage  in  his  annual  report  for 
1898  favored  the  assimilation  of  Porto  Rican  currency  to 
that  of  the  United  States,  and  its  conversion  at  60  cents  to 

1  Cf.  infra,  pp.  325,  344-45. 
J  Cf.  infra,  pp.  210-11. 

1  The  advisability  of  the  permanent  use  in  Porto  Rico  of  an  American  coin 
of  the  denomination  of  60  cents  was  also  considered. 


194     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

the  peso ;  but  this  assimilation  was  to  be  accomplished  only 
so  rapidly  as  could  be  done  "without  unduly  disturbing 
existing  conditions,  and  contract  relations  in  Porto  Rico."  1 
"It  is  not  contemplated,"  he  said,  "in  the  considerations 
here  presented  to  retire  the  Porto  Rican  coins :  certainly 
not  until  the  coins  of  the  United  States  have  become  familiar 
and  acceptable  to  the  people."  The  Secretary  was  much 
impressed  with  the  importance  of  heeding  popular  prejudice 
in  such  a  matter  as  the  currency,  and  of  the  danger  of  trying 
suddenly  to  force  United  States  currency  into  circulation. 

"Therefore,  the  peso,  if  received  through  the  customs  house 
or  for  other  taxes,  or  if  received  in  exchange  for  Ameri- 
can money  at  the  government  agencies,  should  be  again 
disbursed  or  re-exchanged  as  the  demand  from  the  people 
might  require.  In  fact  it  may  be  necessary,  in  order  to 
give  absolute  steadiness  to  the  peso,  not  only  to  receive  or 
redeem  it  at  a  fixed  price  to  be  again  disbursed  at  the  same 
price,  but  it  may  also  be  necessary  to  coin  at  our  mints  an 
additional  amount  of  pesos  and  their  fractional  parts  for 
use  in  the  Island."  2 

These  coins,  it  was  contemplated,  would  not  be  copies  of 
the  Spanish  Porto  Rican  pesos,  but  would  bear  the  insignia 
of  American  sovereignty. 

Commissioner  Porter,  in  his  report  to  Secretary  Gage, 
favored  the  introduction  of  United  States  currency  into 
circulation  along  with  Porto  Rican  currency,  by  making  it 
legal  tender,  receivable  for  taxes  at  the  rate  of  60  cents  to 
the  peso,  and  by  the  giving  out  of  pesos  for  United  States 
currency  at  this  rate.  He  said : 

"  The  objection  to  do  away  with  all  the  present  Porto  Rican 
currency,  exchanging  it  for  American  silver,  is,  as  you  have 
most  aptly  stated,  that  the  day  laborers  are  not  likely  to 
perceive  the  difference  between  the  intrinsic  value  or  mint 
value  of  a  coin  and  its  monetary  par  value  as  a  division 

1  Report,  pp.  89-91.  2  Ibid.,  p.  91. 


FORMULATION  OF  GOLD  STANDARD  PLAN          195 

of  a  gold  coin.  No  amount  of  reasoning  will  convince  them, 
and  the  only  effective  object  lesson  must  be  the  constant  and 
long-continued  taking  and  giving  of  the  peso  by  the  authorities 
at  the  specified  rate  of  60  cents.1  ...  If  the  inhabitants  of 
the  Island  of  Porto  Rico  should  prefer  American  currency, 
as  it  is  hoped  they  will,  the  pesos  will  soon  find  their  way  to 
the  United  States  treasury.  ...  If  the  pesos  are  preferred 
and  more  asked  for  than  should  be  in  stock  at  our  fiscal 
agencies,  this  could  be  met  by  the  coinage  of  a  sixty-cent 
American  silver  piece,  equal  in  size,  weight  and  mint  value 
to  the  existing  Porto  Rican  peso." 2 

To  this  American  peso  it  was  contemplated  giving  a  fixed 
value  in  relation  to  United  States  currency,  and  the  dual 
character  of  the  coin,  it  was  often  suggested,  should  be 
stamped  upon  it.  For  example,  said  former  United  States 
Consul  Philip  C.  Hanna  of  San  Juan :  "On  one  side  of  the 
coin  let  it  read,  'one  Porto  Rican  peso/  and  let  that  peso 
stand  good  for  the  debts  of  the  past  contracted  in  pesos ; 
then  .  .  .  stamp  on  the  other  side  of  the  coin  the  number 
of  cents  that  this  coin  is  worth  in  the  money  of  the  United 
States."  3  A  similar  object,  it  will  be  recalled,  was  in  the 
mind  of  the  Spanish  minister  in  1895  when  he  had  placed 
on  the  new  Porto  Rican  peso  words  implying  that  it  was 
equal  to  five  Spanish  pesetas.4 

Objections  soon  appeared  to  the  plan  of  a  gradual  transi- 
tion to  the  United  States  currency  basis,  either  with  or 
without  the  coinage  of  an  American  Porto  Rican  peso.  One 
objection  was  the  confusion  and  inconvenience  incident  to 
a  dual  currency.  There  were  circulating  at  this  time  in 
the  Island,  United  States  gold  coins,  various  kinds  of 
United  States  paper  money,  silver  dollars,  fractional  silver, 
and  minor  coins ;  also  the  Porto  Rican  peso  and  its  frac- 
tional parts,  and  the  bank  notes  of  the  Spanish  Bank  of 
Porto  Rico.  Although  the  official  rate  was  60  cents  to  the 

1  Italics  are  mine.  '  Carroll,  p.  485. 

2  Porter,  Report,  pp.  5  and  6.  4  Cf.  supra,  pp.  161-62. 


196     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

peso,  or  Pi.66f  to  $i,  even  as  late  as  the  latter  part  of 
1899  and  the  fore  part  of  1900  there  were  numerous  de- 
partures from  this  rate,  and  it  was  common  for  merchants 
to  allow  only  Pi. 65  or  Pi. 60.  For  an  ignorant  people 
like  the  great  mass  of  the  natives,  this  dual  system,  and 
particularly  the  mingling  together  of  fractional  parts  of 
the  dollar  and  fractional  parts  of  the  peso,  were  confusing. 
The  fact,  however,  should  not  be  overlooked  that  most 
of  the  natives  had  little  or  nothing  to  do  with  United 
States  currency,  their  small  money  transactions  being  con- 
fined almost  exclusively  to  the  local  money.1  But  to  the 
American  the  dual  currency  caused  particular  annoyance.2 
It  was  but  natural  therefore  that  there  should  be  a  demand 
for  the  speedy  elimination  of  the  dual  system,  and  that 
Americans  should  make  their  desires  felt  at  home  for  "the 
good  old  American  currency  and  no  other."  The  Sub- 
governor  of  the  Spanish  Bank  of  Porto  Rico,  speaking  on 
this  subject  for  the  Bank,  said  as  early  as  October  24, 1898  : 

"In  this  matter  we  declare  ourselves  frankly  partisans  of 
a  change  quick  and  radical.  We  say  immediate  because 
of  the  damage  to  business  caused  by  the  paralyzation  in- 
duced by  the  uncertainty  of  the  present  state  of  affairs, 
and  to  signify  that  in  our  judgment  the  settlement  should 
not  be  delayed  beyond  December  or  January  next,  the 
period  coincident  with  that  of  low-priced  exchange,  and 
radical  because  we  wish  the  real  effective  substitution  for 
once  and  forever  of  the  American  dollar  for  the  colonial 
peso."  3 

41 

Some  who  favored  prompt  action  none  the  less,  advised 
that  the  conversion  be  not  undertaken  until  the  crop 
period  of  December  to  May  was  over,  so  as  not  to  interfere 
with  crop  financing,  and  so  as  to  make  possible  the  paying 

1  Cf.  infra,  pp.  229-30. 

z  See  Report  of  United  States  Insular  Commission,  on  Civil  Affairs  in 
Porto  Rico,  to  the  Secretary  of  War,  1899,  p.  17. 
3  Carroll,  p.  474. 


FORMULATION  OF  GOLD   STANDARD  PLAN  197 

off  by  the  agricultural  interests  of  many  of  their  short-time 
obligations  to  the  commercial  interests  at  the  annual  settle- 
ment period,  before  the  old  pesos  should  be  withdrawn  from 
circulation.1 

A  second  argument  advanced  for  speedy  action  was  that  if 
a  long  period  were  allowed  for  conversion,  the  result  would 
be  variations  between  the  official  rate  and  the  commercial 
rate  leading  to  harmful  speculation.2  It  was  never  satis- 
factorily explained,  however,  just  how  such  speculation 
would  be  possible  if  the  Government  should  receive  both 
kinds  of  money  at  a  fixed  relation  to  each  other,  and  should 
pay  out  on  demand  in  convenient  places  throughout  the 
Island  pesos  for  dollars  and  dollars  for  pesos  at  the  official 
rate. 

A  third  argument  in  favor  of  speedy  action,  and  one  upon 
which  much  emphasis  was  placed,  was  the  danger  of  illicit 
coinage  and  importation  of  Porto  Rican  pesos.  The  dies 
from  which  these  coins  were  made,  as  previously  noted,  were 
believed  to  be  still  in  existence.  The  business  of  illicitly 
smuggling  coins  into  Porto  Rico  had  been  an  established 
one  of  long  duration.3  In  this  case  it  was  claimed  the  profits 
would  be  large,  i.e.,  35  per  cent  to  40  per  cent,  if  a  6o-cent 
gold  rate  were  adopted,  and  that  the  Spaniards  would  have 
no  scruples  in  thus  taking  advantage  of  Americans.  "Cer- 
tainly," said  one  witness,4  "the  Spaniards  have  no  love  for 
the  Americans  and  they  would  not  hesitate  to  coin  large 
quantities  of  Porto  Rican  pesos,  in  full  weight  and  fineness, 
when  by  that  operation  they  would  gain  10  to  n  cents  gold 
per  peso.  There  are  certainly  lots  of  Spanish  firms  in  the 
Island  that  would  help  their  friends  to  carry  on  such  a 
profitable  business."  5 

1  Cf.  testimony  of  Manuel  Egozcue  representing  a  provincial  deputation. 
Carroll,  pp.  467-468. 

2  Cf.  Memorandum  of  Carlos  M.  Soler,  ibid.,  p.  474. 
'Supra,  pp.  158-59. 

4  Carroll,  p.  482. 

6  The  United  States  Insular  Commission  in  its  report  of  June  1899  (cited 


198    THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

The  danger  of  smuggling  illicit  coins  into  the  Island  may 
have  been  a  real  one  in  the  Spanish  days  from  1886  to 
1895,  when  the  Mexican  peso,  which  was  an  article  of  world 
merchandise,  was  circulating  at  a  high  monopoly  value  in 
Porto  Rico,  and  when  Spanish  customs  officials  in  the  Island 
were  notoriously  lax  in  their  administration,  if  not  corrupt ; 
and  this  danger  may  possibly  have  justified  the  great  brevity 
with  which  the  Spaniards  carried  through  the  currency 
reform  of  1895.  It  was  n°t>  however,  an  adequate  reason 
for  rushing  through  the  reform  of  1900.  The  coin  to  be 
withdrawn  was  a  local  coin  which  did  not  circulate  outside 
of  the  country,  American  customs  administration  in  the 
Island  at  that  time  was  efficient  and  honest,  there  was  no 
proof  that  coins  were  being  illegally  made  from  the  old  dies 
and  imported  j1  and  were  such  a  danger  a  real  one,  it  would 
long  since  have  been  realized,  because  for  over  a  year 
before  the  canje  was  begun  the  peso  had  been  circulating 
in  the  Island  at  a  gold  value  of  35  to  40  per  cent  above  its 
bullion  value,  and  had  been  interchangeable  with  United 
States  currency  at  approximately  that  rate. 

Those  persons  who  favored  immediate  and  rapid  conver- 
sion of  pesos  into  American  currency  —  and  the  evidence 

supra,  p.  196)  said  on  this  subject  (pp.  16-17) :  "It  is  also  claimed  that  large 
amounts  of  silver  stamped  with  the  Porto  Rican  stamp,  in  the  form  of  pesos, 
are  now  coming  into  the  Island  from  Spain  or  some  other  country,  and  our 
attention  was  called  to  the  great  number  of  silver  pesos  bearing  the  date  of 
1895,  all  apparently  new,  which  are  now  in  circulation.  It  may  be  that  this 
silver  is  only  part  of  the  currency  which  was  paid  to  the  Spanish  soldiers 
before  leaving  Porto  Rico,  and  which  was  carried  with  them  to  Spain  [cf. 
supra,  p.  163],  and  is  now  drifting  back  to  the  Island,  but  it  would  appear 
as  if  there  is  most  certainly  an  increase  in  the  silver  of  the  country." 

In  explanation  of  the  large  amounts  of  new  silver  coins  that  were  ap- 
pearing in  circulation,  the  Military  Governor  said  in  his  Report  of  September 
30,  1899 :  that  up  to  about  that  time  there  had  been  lying  in  the  banks  and 
merchants'  safes  "  two  or  three  millions  of  Puerto  Rican  pesos  that  had  never 
been  removed  from  the  original  paper  envelopes  in  which  they  were  packed 
at  the  mints  "  (page  509). 

1  The  figures  for  the  later  conversion  showed  that  the  supply  of  colonial 
money  in  the  Island  presented  for  redemption  was  slightly  below  the  esti- 
mated figures  for  the  amount  in  circulation.  Cf .  infra,  p.  204. 


FORMULATION  OF  GOLD  STANDARD  PLAN  199 

seems  to  show  that  they  were  in  the  majority  among  those 
who  took  an  active  interest  in  the  subject  —  naturally  were 
opposed  to  the  introduction  of  an  intermediate  American 
peso  as  a  substitute  for  the  Spanish  Porto  Rican  peso. 
To  them  such  a  procedure  seemed  to  be  merely  a  method  of 
prolonging  the  trouble.  The  introduction  of  an  American 
peso  at  a  value  of  60  cents,  it  was  argued,  would  require 
also  a  suitable  Porto  Rico-American  fractional  coinage,  and 
the  introduction  of  such  a  system  would  not  only  be  ex- 
pensive, but  might  clinch  for  a  long  time  a  dual  currency 
for  the  Island. 

The  Porto  Rican  Currency  Question  in  the  United  States 

Congress 

The  Congressional  history  of  the  legislation  concerning 
Porto  Rican  currency  demands  little  attention.  There 
was  not  much  debate  on  the  subject,  and  most  of  what  there 
was  either  was  irrelevant  or  showed  gross  ignorance  of  the 
problem  and  of  the  monetary  principles  involved. 

The  provisions  for  the  currency  reform  were  enacted 
as  part  of  the  Porto  Rico  Civil  Government  Act,  commonly 
known  as  the  Foraker  Act.  On  February  19,  1900  the  Porto 
Rican  Civil  Government  bill  (H.R.  8245)  came  before  the 
House  in  Committee  of  the  Whole,  on  motion  of  Representa- 
tive Payne  of  New  York.  It  contained  no  provisions  for 
currency  reform.  The  bill  was  debated  for  several  days 
and  passed  the  House  February  28.  It  was  immediately 
reported  to  the  Senate  by  Senator  Foraker  of  Ohio,  the 
Chairman  of  the  Senate  Committee  on  Pacific  Islands  and 
Porto  Rico.  As  a  matter  of  fact  the  subject  had  been  in- 
formally considered  by  the  Senate  Committee  for  several 
months  before  the  bill  was  formally  reported  to  the  Senate 
from  the  House.1  The  House  bill  was  referred  to  the  Senate 
Committee  on  March  i,  and  reported  back  to  the  Senate 

1  Cong.  Rec.,  March  i,  1900,  p.  2437. 


200    THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

with  amendments  the  next  day.  In  the  bill  the  Senate 
Committee  had  inserted  the  following  provisions  regarding 
the  currency : 

"That  for  the  purpose  of  retiring  the  Porto  Rican  coins 
now  in  circulation  in  Porto  Rico  and  substituting  there- 
for the  coins  of  the  United  States,  the  Secretary  of  the 
Treasury  is  hereby  authorized  to  redeem,  on  presentation  in 
Porto  Rico,  all  the  silver  coins  of  Porto  Rico  known  as  the 
peso  and  all  other  silver  and  copper  Porto  Rican  coins  now 
in  circulation  in  Porto  Rico,  not  including  any  such  coins 
that  may  be  imported  into  Porto  Rico  after  the  ist  day  of 
February,  nineteen  hundred,  at  the  present  established  rate 
of  60  cents  in  the  coins  of  the  United  States  for  one  peso  of 
Porto  Rican  coin,  and  for  all  minor  or  subsidiary  coins  the 
same  rate  of  exchange  shall  be  applied.  The  Porto  Rican 
coins  so  purchased  or  redeemed  shall  be  recoined  at  the  ex- 
pense of  the  United  States,  under  the  direction  of  the 
Secretary  of  the  Treasury,  into  such  coins  of  the  United 
States  now  authorized  by  law  as  he  may  direct,  and  from 
and  after  three  months  after  the  date  when  this  act  shall 
take  effect  no  coins  shall  be  a  legal  tender,  in  payment  of 
debts  thereafter  contracted,  for  any  amount  in  Porto 
Rico,  except  those  of  the  United  States,  and  whatever  sum 
may  be  required  to  carry  out  the  provisions  hereof,  and 
to  pay  all  expenses  that  may  be  incurred  in  connection 
therewith,  is  hereby  appropriated,  and  the  Secretary  of  the 
Treasury  is  hereby  authorized  to  establish  such  regulations 
and  employ  such  agencies  as  may  be  necessary  to  accom- 
plish the  purposes  hereof;  Provided,  however,  That  all 
debts  owing  on  the  date  when  this  act  shall  take  effect 
shall  be  payable  in  the  coins  of  Porto  Rico  now  in  circula- 
tion, or  in  the  coins  of  the  United  States  at  the  rate  of  ex- 
change above  named."1 

As  previously  noted,  the  currency  provisions  of  the  bill 
received  scant  consideration  in  Congress.  Senator  Morgan 
of  Alabama  proposed  an  amendment  coupling  with  the  bill 

1  Cong.  Rec.,  March  2,  1900,  p.  2469. 


FORMULATION  OF   GOLD   STANDARD   PLAN  2OI 

a  provision  for  the  free  coinage  of  silver,  when  silver  and 
gold  in  certain  quantities  were  brought  to  the  mint  together. 
After  some  discussion  the  amendment  was  lost,  and  then  the 
Senator  proposed  an  amendment  providing  for  the  redemp- 
tion of  Porto  Rican  pesos  in  United  States  dollars,1  at  par, 
later  corrected  to  93!  cents,2  when  he  learned  that  the 
peso  contained  but  93!  per  cent  as  much  pure  silver  as  the 
American  dollar.  The  reasoning  naively  ignored  the  money 
value  of  the  two  coins  and  viewed  the  coins  entirely  from 
the  standpoint  of  their  respective  bullion  contents.  To  the 
mind  of  more  than  one  Senator  the  bill  involved  a  proposal 
to  take  away  33!  cents  or  40  cents  of  every  peso  owned  by 
the  poor  Porto  Ricans,  and  put  it  into  the  Treasury  of  the 
United  States.3  This  amendment  was  lost  by  a  vote  of 
33  to  i2.4  Senator  Foraker  of  Ohio,  in  defending  the  bill, 
spoke  of  the  inconveniences  of  a  dual  currency  in  Porto  Rico, 
and  the  desire  of  the  Porto  Ricans  to  have  but  one  currency, 
and  the  " apparently  universal  sentiment"  in  the  Island  that 
that  currency  should  be  the  currency  of  the  United  States. 

"The  only  question  is,"  he  said,  "how  can  that  transac- 
tion be  consummated?  The  method  provided  by  this  bill 
is  the  only  way  that  anybody  has  pointed  out.  Our  en- 
deavor was,  after  that  was  settled,  to  find  a  rate  of  exchange 
that  would  be  fair  to  the  people  of  Porto  Rico ;  and  inas- 
much as  the  President  had  fixed  60  per  cent  as  the  rate 
of  exchange  while  the  two  coins  were  in  circulation  there, 
we  adopted  that  rate  for  this  measure."  5 

1  Ibid.,  March  29,  1900,  p.  3477. 

2  Ibid.,  p.  3511. 

1 "  Can  we  take  from  these  people,  poor  as  they  are  represented  to  be, 
this  40  cents  in  every  dollar  and  put  it  into  the  Treasury  of  the  United  States, 
and  go  home  and  go  to  bed  and  sleep  with  our  own  consciences?"  Senator 
Morgan,  Cong.  Rec.,  March  30,  1900,  p.  3478. 

"It  not  only  destroys  40  per  cent  of  the  money,  but  we  take  that  40  per 
cent  ourselves  and  put  it  into  our  treasury."  Senator  Bacon  of  Georgia, 
Cong.  Rec.,  March  29,  1900,  p.  3478. 

4  Cong.  Rec.,  March  30,  1900,  p.  3512. 

6  Cong.  Rec.,  March  30,  1900,  p.  3511. 


202     THE  PORTO  RICAN   CURRENCY  REFORM  OF   1899-1900 

On  April  3  the  Senate  passed  the  House  bill  as  amended, 
by  a  vote  of  40  to  31,  16  not  voting.  The  bill  was  returned 
to  the  House  on  April  4,  and  referred  to  the  Committee  on 
Ways  and  Means.  On  April  10  the  Committee  reported 
it  back  to  the  House  with  recommendation  that  the  Senate's 
amendments  be  accepted.  This  was  done  on  April  n,  by 
a  vote  of  161  to  153,  n  answering  "present"  and  26 
not  voting.1  On  April  12  the  bill  received  the  signature 
of  the  President,  and  on  May  i  the  new  Civil  Government 
was  inaugurated  in  Porto  Rico  under  the  governorship  of 
Charles  H.  Allen. 

1  Cong.  Rec.,  April  n,  1900,  p.  4071. 


CHAPTER  IV 

PUTTING  THE  UNITED  STATES  CURRENCY  SYSTEM   INTO 
OPERATION  IN  PORTO  Rico 

THE  work  of  withdrawing  the  old  currency  from  circula- 
tion was  handled  by  the  United  States  Treasury  Depart- 
ment. Two  special  agents  were  sent  by  the  Department  to 
Porto  Rico.  They  arrived  April  30,  and  began  work  the 
following  day,  the  day  on  which  the  Act  of  April  12  went 
into  effect.  One  of  the  two  special  agents,  who  is  still  in 
the  United  States  Treasury  Department,  wrote  me  under 
date  of  August  30, 1915,  in  answer  to  an  inquiry  concerning 
the  exchange:  "We  visited  every  important  town  on  the 
Island  during  our  four  months'  sojourn — holding  interviews 
with  officials,  bankers,  and  merchants.  .  .  .  The  people 
of  the  Island  were  notified  of  our  presence  through  publi- 
cations in  the  Porto  Rican  newspapers  and  by  circulars 
scattered  and  posted  by  the  civil  officials."  Banks  and 
banking  houses  were  appointed  as  agents  to  conduct  the 
exchanges  in  San  Juan,  Ponce,  Mayagiiez,  and  Cayey. 
They  were  allowed  1/8  of  i  per  cent  on  amounts  exchanged, 
and  expenses.  One  of  the  special  agents  spent  one  day  in 
Fajardo,  making  exchanges  for  the  accommodation  of  the 
eastern  end  of  the  Island  and  the  adjacent  islands.  The 
special  agent  wrote :  "The  peons  or  peasants  of  Porto  Rico 
had  no  savings,  and  the  money  we  received  came  from  the 
banks  and  merchants.  There  was  considerable  opposition, 
at  first,  to  the  exchange.  .  .  ." 

The  time  contemplated  for  the  withdrawal  of  the  old 
currency  was  but  three  months,  since  the  law  provided 

203 


204     THE  PORTO  RICAN  CURRENCY  REFORM  OF   iSgg-igoo 

that  "from  and  after  three  months  from  the  date  when  this 
Act  shall  take  effect  no  coins  shall  be  a  legal  tender,  in  pay- 
ment of  debts  thereafter  contracted,  for  any  amount  in 
Porto  Rico,  except  those  of  the  United  States."  About 
July  3  the  Treasury  agents  received  authority  from  the 
Secretary  of  the  Treasury  to  continue  the  exchange  opera- 
tions after  July  3I.1  They  continued  their  work  until 
August  20,  and  during  that  time  they  redeemed  and  shipped 
to  the  United  States  mint  at  Philadelphia  P  5,470,705. 2 
Upon  their  return  to  the  United  States  the  latter  part  of 
August,  the  banking  firm  of  De  Ford  and  Company  of  San 
Juan  was  designated  to  continue  the  exchange.  It  re- 
deemed, from  August  20,  1900  to  June  30,  1901,  P 302,996^ 
This  gave  a  total  redemption  of  P  5, 733, 701,  or  about 
Pi  16,000  less  than  the  figures  previously  given4  for  the 
circulation  of  Spanish  and  Porto  Rican  coins  in  the  Island, 
showing  the  fallacy  of  the  rumors  concerning  the  smuggling 
into  the  Island  of  large  quantities  of  illicit  colonial  coins 
in  1899  and  i90o.5 

1  La  Correspondencia  de  Puerto  Rico,  San  Juan,  July  24,  1900. 

2  Ann.  Rep.  Sec.  Treas.,  1900,  p.  Ixxvi. 

3  Ibid.,  1901,  p.  70. 

4  Supra,  p.  165. 

6  The  Acting  Superintendent  of  the  United  States  Mint  at  Philadelphia, 
the  mint  at  which  the  Porto  Rican  money  was  recoined,  informed  the  writer 
by  letter  of  November  2,  1915,  that  the  kinds  of  money  recoined  were  as 
follows : 

5-centavo  pieces,  equaling  ....  4,312.27  pesos 
lo-centavo  pieces,  equaling  ....  14,353.40  pesos 
2o-centavo  pieces,  equaling  ....  339,265.80  pesos 
40-centavo  pieces,  equaling  ....  144,832.90  pesos 

Peso  pieces,  equaling 2,889,828.25  pesos 

3>3Q2,592.62  pesos 

Mixed  coin,  unassorted,  equaling  .     .     .  2,307,649.10  pesos 
Total  silver  coin 5,700,241.72  pesos 

Copper  bronze  coin,  the  equivalent  of    .       34,126.77  pesos 
Total 5,734,368.49  pesos 

This  total  is  767.49  pesos  larger  than  the  total  reported  by  the  Secretary 


INTRODUCING  UNITED   STATES   CURRENCY  SYSTEM     205 

As  early  as  April  27,  the  Spanish  Bank  of  Porto  Rico  had 
issued  a  notice  to  the  effect  that :  the  canje  having  been 
decreed,  the  Bank  had  decided  to  replace  its  present  bank 
notes  of  provincial  money  by  other  notes  payable  in  Ameri- 
can money;  and  that  at  the  opportune  time  current  and 
deposit  accounts  would  be  transferred  to  the  American 
currency  basis.  On  August  n  it  was  announced  in  the 
newspapers  that  the  new  notes  were  in  circulation.1 

The  work  of  exchanging  the  new  currency  for  the  old  was 
criticized,  apparently  with  justice,  on  two  grounds. 

Kinds  and  Denominations  of  United  States  Money  Paid  Out 

It  will  be  recalled  that  the  money  work  of  Porto  Rico  for 
many  years  had  been  done  chiefly  with  coins  of  the  de- 
nomination of  a  peso  or  less.2  The  Porto  Rican  bank  notes, 
which  were  of  large  denominations,  were  being  replaced 
by  others  payable  in  United  States  currency  of  equivalent 
value.  Furthermore,  the  American  notes  already  in  the 
Island  were  meeting  needs  for  money  of  denominations 
larger  than  a  peso.  One  would  expect  then  that  the  pro- 
vincial pesos  and  the  fractional  silver  and  minor  coins 
would  have  been  redeemed  in  American  silver  dollars, 
fractional  silver,  and  minor  coins;  and  that,  inasmuch  as 
the  American  5o-cent  piece  was  the  coin  nearest  in  value  to 

of  the  Treasury  in  1901,  —  a  difference  which  is  probably  to  be  accounted 
for  by  receipts  of  Porto  Rican  coins  subsequent  to  June  30,  1901. 

The  Porto  Rican  coin  received  was  recoined  into  United  States  money  as 
follows : 

Half  dollars $2,250,633.50 

Quarter  dollars 1,514,338.25 

Dimes 1,862,635.20 

Total  silver $5,627,606.95 

Bronze  cents 52,720.20 

Total $5,680,327.15 

The  recoinage  was  at  the  expense  of  the  United  States  Government. 

1  La  Correspondencia,  San  Juan,  April  30  and  Aug.  n,  1900. 

2  Supra,  p.  165. 


206     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

the  provincial  peso,  the  Government  would  have  introduced 
a  large  amount  of  these  pieces.  A  high  official  in  the 
Porto  Rican  Government  service  wrote  the  author  under 
date  of  November  4,  1915  :  "The  American  silver  dollar  is 
not  popular  because  it  always  requires  to  be  changed  for 
the  needs  of  the  great  mass  of  the  people.  It  is  a  clumsy 
coin  they  like  to  get  changed  as  rapidly  as  possible.  The 
half-dollar  more  nearly  meets  their  needs  and  is  much  more 
popular.  Gold  coins  circulate  to  a  very  little  extent." 

As  a  matter  of  fact,  of  the  $3,200,000  of  United  States 
funds  which  the  Treasury  agents  paid  out  in  exchange  for 
the  more  than  five  million  pesos  of  provincial  coins  (all 
of  the  latter  being  of  denominations  not  greater  in  value 
than  60  cents  in  United  States  currency),  $700,000  was  in 
the  form  of  exchange  on  New  York  city,  and  $2,500,000  in 
money  of  the  following  kinds  and  denominations : 

Gold  Coin : 

Double  eagles $200,000 

Eagles 500,000 

Half  eagles 445,ooo         $1,145,000 

Silver  Certificates : 

Tens 300,000 

Fives 180,000 

Ones 300,000  780,000 

Standard  Silver  Dollars :  200,000 

Subsidiary  Silver : 

Half  dollars 125,000 

Quarters 125,000 

Dimes 50,000  300,000 

Minor  Coins : 

Nickels 50,000 

Cents 25,000  75,000 

$2,500,000 

These  are  the  official  figures  furnished  the  writer  by  one 
of  the  two  Special  Treasury  Agents  who  had  charge  of  the 
work.  He  adds:  "Very  little  of  the  paper  money  (silver 


INTRODUCING  UNITED   STATES   CURRENCY  SYSTEM     207 

certificates)  was  retained  in  circulation  on  the  Island,  - 
but  [it]  was  almost  immediately  returned  to  this  country 
by  the  bankers  and  merchants  to  meet  bills." 

The  above  figures  show  that  of  the  $2,500,000  paid  out, 
exclusive  of  the  New  York  exchange,  only  $375,000  or  15 
per  cent  was  in  denominations  as  small  or  smaller  than  the 
peso,  and  that  $1,625,000  or  65  per  cent  was  in  denomina- 
tions over  eight  times  as  large  as  the  peso  (i.e.  of  $5  or  over). 
Although  gold  had  not  circulated  readily  in  Porto  Rico, 
$1,145,000  of  the  amount  paid  out  was  in  gold  coin.  In 
his  annual  report  of  September  30,  1899  the  Military 
Governor  had  said:  "The  funds  sent  here  for  army  dis- 
bursements should  be  in  silver,  nickel,  and  copper.  .  .  . 
Paper  money  soon  disappears,  while  metallic  money  would 
be  much  more  likely  to  make  its  way  into  general  circulation 
and  remain  there."1  Despite  this,  the  treasury  agents 
paid  out  $780,000  in  bills,  of  which  $480,000  were  in  de- 
nominations of  five  and  ten  dollars. 

It  would  appear  that  the  convenience  of  those  who  did 
the  exchange  work,  and  the  immediate  convenience  of  the 
large  merchants  and  bankers  who  turned  in  the  bulk  of  the 
provincial  money,  rather  than  the  needs  of  the  Porto 
Rican  public  dictated  the  form  of  United  States  money  paid 
out.  It  is  not  surprising  that  we  read  in  one  of  the 
daily  papers  of  August  n  that  "great  scarcity  exists  in 
the  entire  Island  of  small  money  of  silver  and  copper.  .  .  . 
Letters  which  we  are  receiving  from  all  parts  of  the  Island 
announce  the  approach  of  serious  trouble." 

Inadequate  Number  of  Exchange  Offices 

The  second  ground  on  which  the  work  of  the  exchange 
was  criticized  was  the  lack  of  a  sufficient  number  of  con- 

1  Page  506. 

2  La  Correspondencia,  San  Juan,  August  n,  1900. 

Cf.  also  report  of  Dr.  Jacob  H.  Hollander,  Treasurer  of  Porto  Rico,  in 
First  Annual  Report  of  the  Governor  of  Porto  Rico,  1901,  p.  195. 


208     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

veniently  located  exchange  offices.  It  appears  that  for 
the  most  part  exchange  offices  were  opened  only  in  the  prin- 
cipal cities.1  The  banks  that  held  large  supplies  of  the 
colonial  money  as  reserves,  the  substantial  merchants  who 
held  moderate  amounts  as  till  money,  and  the  speculators 
who  had  been  collecting  and  hoarding  the  colonial  coins  in 
the  expectation  of  realizing  a  high  gold  rate  of  conversion  2 
—  all  these  brought  their  money  with  little  expense  and 
inconvenience  to  the  exchange  offices  and  converted  it 
into  American  currency.  This  was  also  true  of  many  of 
the  poorer  classes  who  lived  in  or  near  the  few  large  cities 
in  which  exchange  offices  were  established.  But  for  hun- 
dreds of  thousands  of  small  farmers  and  peons  scattered 
over  the  Island  and  living  in  places  remote  from  the  large 
cities  the  exchange  resulted  in  real  hardship.  Many  indi- 
vidual cases  were  cited  where  these  people  suffered  heavily. 
An  open  letter  to  Governor  Allen  on  the  subject,  dated 
June  25,  1900,  nearly  two  months  after  the  exchange 
work  was  begun,  signed  by  a  Porto  Rican  business  house, 
was  published  in  La  Correspondencia  in  San  Juan  in  its 
issue  of  June  25.  The  firm  refers  to  having  seen  a  circular 
issued  by  the  Treasury  agents  under  date  of  June  20,  in 
which  they  request  the  people  of  the  Island  to  go  to  San 
Juan,  Ponce,  or  Mayagiiez,  the  only  places  where  exchange 
agencies  had  up  to  that  time  been  established,  to  redeem 
their  Porto  Rican  money  in  United  States  currency.  It 
calls  attention  to  the  injustice  of  such  a  requirement  to  the 
poor  people  far  removed  from  these  cities,  and  mentions 
the  large  number  of  exchange  offices  established  throughout 
the  Island  by  the  Spanish  Government  in  1895  when  Spain 
substituted  the  provincial  money  for  the  Mexican  money.3 

1  Cf.  list  of  places  previously  cited,  p.  203;  also  Davis,  Ann.  Rep.,  1900, 
p.  174. 

2  Cf.  Carroll,  pp.  496-97. 

3  The  letter  refers  to  a  recommendation  contained  in  the  Treasury  agent's 
circular  that  commissions  be  named  in  each  pueblo  to  collect  the  provincial 
money  from  the  people,  in  order  to  exchange  it  at  the  exchange  offices  in  the 


INTRODUCING  UNITED   STATES   CURRENCY  SYSTEM     209 

A  conservative  statement  of  the  situation  is  that  of  General 
Davis  in  his  report  as  Military  Governor  for  1900 : 

"To  get  the  local  money  from  the  interior  to  these  [few] 
points  [where  the  Treasury  agents  had  established  ex- 
changes] was  not  easy,  and  the  expense  for  transportation 
was  considerable.  This,  of  course,  fell  on  the  inhabitants. 
The  peon  who  was  so  fortunate  as  to  be  the  possessor  of  a 
few  pesos  was  illiberally  dealt  with  by  the  merchants  or 
others  who  collected  the  money.  False  reports  were  circu- 
lated, and  some  were  made  to  believe  that  if  they  did  not 
turn  in  their  pesos  immediately  they  would  soon  be  value- 
less."  1 

Although  this  exchange  was  effected  at  much  less  expense 
than  the  Spanish  exchange  of  1895  and  a  longer  time  was 
allowed,  it  was  not  managed  with  anything  like  as  much 
convenience  to  the  public  as  the  Spanish  canje  in  which, 
as  we  have  seen,2  exchange  offices  were  established  in 
some  forty-two  places  over  the  Island.  The  work  of  the 
exchange  was  controlled  from  Washington  by  people  un- 
familiar with  Porto  Rican  conditions,  the  force  employed 
to  carry  on  the  work  was  altogether  too  small,  and  the 
length  of  time  allowed  for  its  accomplishment  was  under 
the  circumstances  inadequate. 

principal  cities  and  bring  back  to  the  people  the  American  money  received. 
Such  a  proposal  the  letter  characterizes  as  simply  absurd,  because  of  the 
expense  and  labor  involved,  and  of  the  unwillingness  of  the  people  to  trust 
their  hard-earned  savings  to  such  commissioners.  The  letter  suggested  that 
exchanges  be  established  in  all  customs  houses. 

La  Correspondencia  in  its  issue  July  30,  1900  said  that  it  was  being  over- 
whelmed with  questions  from  towns  all  over  the  Island  as  to  what  had  been 
decided  concerning  the  exchange,  since  the  period  of  exchange  was  supposed 
to  end  that  day,  and  there  was  much  money  not  yet  exchanged.  It  referred 
to  Arecibo,  a  town  of  over  8000  population  and  of  great  commercial  im- 
portance, as  not  having  had  any  exchange  agency  designated  for  it. 

1  Report,  p.  174. 

2  Supra,  p.  162. 


CHAPTER  V 

SOME  ECONOMIC  RESULTS  or  THE  PORTO  RICAN  CURRENCY 

REFORM 

THE  economic  results  of  the  reform  may  be  considered 
under  the  rubrics :  debts,  foreign  trade,  domestic  wholesale 
prices,  domestic  retail  prices,  house  rents,  and  wages.  It 
is  only  upon  the  last  three  items  that  any  considerable  in- 
fluence can  be  traced.  Let  us  briefly  consider  first,  however, 
the  other  items. 

Debts 

In  the  discussion  of  the  proper  rate  of  conversion  prior 
to  the  Act  of  April  12,  1900,  the  equities  between  debtor 
and  creditor  played  a  most  important  role.  After  the  rate 
was  once  decided  upon,  this  subject  appears  to  have  aroused 
little  interest.  A  search  through  Porto  Rican  newspapers 
of  the  year  1900  disclosed  no  local  discussion  of  the  subject. 
Of  course  many  creditors  were  disappointed  that  the  gold 
rate  was  so  low  as  60  cents,  and  many  debtors,  that  the  rate 
was  so  high.  The  more  intelligent  of  both  classes,  however, 
accepted  the  rate  as  a  reasonable  compromise,  and  as  it  was 
the  rate  which  had  already  been  in  force  for  nearly  a  year 
and  a  half  there  was  little  difficulty  in  commuting  outstand- 
ing debts  to  the  new  currency. 

Foreign  Trade 

As  we  have  already  seen,1  there  are  few  countries  in  the 
world  whose  prosperity  rests  so  much  on  foreign  trade  as 

1  Supra,  p.  193. 
210 


RESULTS  OF  THE   PORTO  RICAN   CURRENCY  REFORM     21 1 

Porto  Rico.  Despite  the  backwardness  of  the  country  and 
the  fact  that  nearly  three  fourths  of  its  adult  male  popula- 
tion could  neither  read  nor  write,  its  per  capita  foreign 
trade  amounted  to  $22.60  United  States  currency  in  1897, 
and  was  nearly  as  large  as  that  of  the  United  States  for  the 
same  year,  which  was  but  $2 5. 36.*  The  big  fact  in  the  ex- 
planation is  of  course  that  for  Porto  Rico  the  great  bulk  of 
the  trade  was  foreign,  while  for  the  United  States  the  foreign 
trade  constituted  but  a  very  small  percentage  of  the  total. 

During  Spanish  times  this  Porto  Rican  foreign  trade  had 
been  handicapped  by  the  instability  of  exchange  rates,  but 
since  President  McKinley's  proclamation  of  January  i, 
1899  fixing  the  official  valuation  of  the  peso  at  60  cents,  ex- 
change rates  on  gold  standard  countries  had  been  com- 
paratively stable.  As  to  foreign  exchange  rates,  therefore, 
the  canje  recognized  a  situation  that  had  been  existing  for 
nearly  a  year  and  a  half.  By  fixing  a  definite  rate  of  con- 
version, however,  it  lessened  the  need  on  the  part  of  ex- 
porters and  importers  of  making  forward  exchange  con- 
tracts as  a  means  of  protection  against  unfavorable  exchange 
fluctuations  pending  the  carrying  out  of  their  business  con- 
tracts.2 

The  chief  influence  exerted  by  the  canje  upon  the  foreign 
trade  of  the  Island  appears  to  have  been  through  its  effect 
in  raising  wages — a  subject  to  be  considered  later.3  The 
higher  wages  measured  in  gold  which  the  planters  were 
compelled  to  pay  increased  somewhat  the  expense  of  pro- 
ducing sugar  and  tobacco,  and  probably  put  a  small  handi- 
cap on  the  export  trade  in  these  articles,  because  in  neither 
article  did  the  Island  have  such  a  monopoly  (as  for  example 
the  Federated  Malay  States  had  in  tin  at  the  time  of  the 
Straits  Settlements  currency  reform  in  I9O5)4  that  it  could 
collect  this  extra  expense  in  the  form  of  a  higher  price  charged 

1  Computations  are  made  on  the  basis  of  59  cents  to  the  peso  and  the 
census  population  of  1900. 

2  Cf.  infra,  pp.  296-98.    3  Cf.  infra,  pp.  220-22.     *  Cf.  infra,  pp.  430-32. 


212     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

to  the  foreign  importer.  On  the  other  hand,  by  placing 
sums  of  larger  gold  value  in  the  hands  of  the  laborers,  the 
canje  may  have  tended  to  enhance  slightly  the  demands  for 
the  imported  articles  they  consumed.1  There  were  so 
many  other  forces  coming  into  operation  at  this  time,  how- 
ever, that  it  is  utterly  impossible  to  disentangle  their  in- 
fluences from  that  of  the  canje,  and  to  assign  to  any  one 
of  them  its  proportionate  importance.  For  example,  the 
entire  economic  life  of  the  Island  was  being  revolutionized 
through  the  disruption  of  long-established  Spanish  connec- 
tions and  the  establishment  of  a  new  insular  government 
and  new  relations  with  the  United  States.  The  Act  of 
April  12,  1900  substituted  for  the  tariff  laws  of  Spain 
those  of  the  United  States,  and  established  duties  of  1 5  per 
cent  of  the  Dingley  tariff  rates  on  all  merchandise  passing 
between  Porto  Rico  and  the  United  States.  The  hurricane 
of  August  8,  1899  —  one  of  the  worst  in  the  history  of  the 
Island  —  destroyed  3500  lives  and  did  damage  to  property 
estimated  at  P  36,000,000,  the  coffee  plantations  suffering 
the  worst.2  Under  such  conditions,  and  in  view  of  the 
paucity  of  trade  data  available,  it  is  not  possible  to  measure 
statistically  the  influence  of  the  canje  upon  the  Island's 
foreign  trade.  It  is  sufficient  to  say  that  it  is  the  judgment 
of  the  best  informed  Porto  Ricans  with  whom  the  writer 
has  been  privileged  to  confer  that  this  influence  was  small. 

Domestic  Wholesale  Prices 

There  is  no  evidence  that  the  canje  had  any  appreciable 
influence  in  Porto  Rico  on  prices  in  wholesale  trade  except 

1  But  see  infra,  p.  217. 

2  The  British  Consul  reported  to  his  Government  in  1900  that  owing  to 
the  great  damage  done  to  the  coffee  plantations  by  the  hurricane  of  1899, 
the  coffee  yield  on  an  average  for  the  whole  Island  in  1900  was  but  one  fifth 
of  an  ordinary  crop.     The  sugar  crop  he  reported  excellent,  but  tobacco, 
he  said,  "since  the  destruction  of  the  Cuban  and  Spanish  outlets,  through 
the  effects  of  the  war,  has  become  quite  a  drug  in  the  market.  .  .  ."     British 
Diplomatic  and  Consular  Reports,  Porto  Rico,  1900,  pp.  6  and  7. 


RESULTS   OF  THE   PORTO   RICAN   CURRENCY  REFORM     213 

possibly  indirectly  through  its  influence  on  wages.  In  the 
wholesale  trade  competition  was  strong  and  the  business 
was  largely  in  the  hands  of  a  few  important  houses.  Local 
wholesale  prices  continued  as  before  to  be  adjusted  to  the 
gold  values  of  the  local  money,  falling  in  nearly  all  cases 
approximately  40  per  cent  when  the  6o-cent  peso  was  dis- 
placed by  the  loo-cent  dollar. 

Retail  Prices 

It  was  upon  retail  prices  that  the  canje  had  its  greatest 
influence.  To  understand  this  influence  one  must  bear 
in  mind  three  important  facts  in  the  economic  life  of 
Porto  Rico : 

(1)  The  great  masses  of  the  people  live  from  hand  to 
mouth.     The  country  is  tropical  and  most  kinds  of  goods 
will  not  keep  except  in  refrigerators.     These  were  expensive 
luxuries  and  at  this  time  were  owned  in  Porto  Rico  only 
by  a  few  of  the  wealthiest  people.     Even  the  despensa,  or 
family  cupboard,  in  which  rice,  sugar,  and  a  few  perishable 
foods  are  kept,  was  found  in  a  comparatively  small  propor- 
tion of  the  homes.     The  laborer  bought  each  day  the  food 
he  wanted  for  the  day,  and  looked  with  suspicion  upon 
food  that  was  bought  yesterday. 

(2)  The  second  fact  is  largely  a  corollary  of  the  first. 
Porto  Rico  was  a  land  of  the  penny ;  the  great  bulk  of  the 
purchases  being  in  petty  amounts.     In  those  sections  (as 
for  example  in  Guayama)  where  native  servants  were  given 
an  allowance  of  so  much  a  day  for  food,  in  addition  to  money 
wages,  the  food  allowance  was  usually  6  cents  to  8  cents.     A 
Porto  Rican  even  to-day  will  buy  a  cent's  worth  of  rice,  a 
cent's  worth  of  bread,  and  half-a-cent's  worth  of  codfish, 
beans,  or  sweet  potatoes.     Often  two  cents  will  buy  three  or 
four  different  articles.     In  1900  it  was  upon  the  centavo 
that  the  great  bulk  of  the  transactions  fell.     There  was 
nothing  like  the  tendency  in  Porto  Rico  that  is  found  in 


214     THE  PORTO  RICAN   CURRENCY  REFORM  OF   1899-1900 

the  United  States  for  prices  to  break  on  the  figures  5  and 
10. 

(3)  During  Spanish  times  the  United  States  had  been 
known  in  Porto  Rico  as  a  land  of  great  wealth  and  of 
millionaires.  Such  Americans  as  visited  the  Island  had 
usually  spent  money  freely.  With  the  American  occupa- 
tion, American  soldiers,  who  were  much  better  paid  than 
Spanish  soldiers,  spent  their  money  generously;  likewise 
American  travelers  and  business  prospectors.  Great  hopes 
were  built  concerning  the  future  of  the  Island,  and  long 
before  there  was  any  official  change  in  the  currency,  prices 
and  wages  in  Porto  Rico  were  moving  rapidly  upward,  as 
is  evidenced  by  the  numerous  references  in  the  news- 
papers 1  to  the  rising  cost  of  living,  and  by  the  public  pro- 
tests that  were  being  made  against  the  alleged  unreasonable 
price  advances  in  the  retail  trade.  This  movement  was 
in  operation  at  the  time  of  the  beginning  of  the  canje, 
May  i,  iQoo.2 

With  a  setting  of  this  kind,  suddenly,  within  a  period  of 
a  few  months,  the  currency  was  converted  into  another 
currency  whose  coins  of  corresponding  denomination  are 
66f  per  cent  more  valuable  in  terms  of  gold.  And  coins 
of  small  denominations  were  replaced  to  a  large  extent  by 
money  of  large  denominations.  It  must  now  be  remem- 
bered that  the  natives  tend  to  measure  the  value  of  similar 


1  See  for  example  an  article  in  La  Correspondencia  of  San  Juan,  April  u, 
1900,  entitled  Subida  de  Precios  es  Escandaloso,  in  which  there  is  a  bitter 
complaint  against  the  rise  in  prices  of  necessities,  and  a  plea  for  government 
action  against  the  unreasonable  exactions  of  retailers. 

2  The  British  Consul  in  his  1900  report  said  that  "the  first  months  of  the 
year  well  kept  up  the  universal  enhancement  in  the  prices  which  had  set 
in  on  the  American  occupation.  .  .  ."     British  Diplomatic  and  Consular 
Reports,  1900,  Porto  Rico,  p.  8. 

General  Davis,  in  the  hearings  before  the  Senate  Committee  in  January 
1900,  was  asked  a  question  concerning  the  cost  of  living  in  Porto  Rico. 
He  replied:  "[It  is]  much  higher  than  in  the  States.  There  are  a  few 
things  which  are  cheaper,  but  most  necessities  are  greater  in  price."  Senate 
Miscellaneous  Documents,  56th  Congress,  ist  Session,  DX,  No.  147,  p.  76. 


RESULTS  OF  THE  PORTO  RIGAN  CURRENCY  REFORM     215 

coins  in  terms  of  their  size,  and  that  the  dollar  and  the  dime 
were  but  little  larger  (namely  about  7  per  cent)  than  the 
peso  and  the  ten-centavo  piece,  respectively ;  and  further, 
that  the  smallest  coin,  the  coin  in  terms  of  which  most  people 
thought  and  bought,  was  suddenly  reduced  to  less  than  two 
thirds  its  former  size,1  and  raised  in  its  gold  value  66f  per 
cent.  With  these  facts  in  mind,  it  can  be  easily  under- 
stood why  retail  prices  for  small  purchases  should  in  a  very 
large  number  of  cases  have  been  transferred  without  reduc- 
tion from  centavos  to  cents  of  66f  per  cent  greater  value. 

Although  there  is  unfortunately  lacking  the  evidence  of 
accurate  price  statistics  on  this  subject,  the  testimony  of 
numerous  responsible  witnesses  and  of  the  contemporary 
press  strongly  supports  this  conclusion. 

As  was  the  experience  a  few  years  later  in  the  Philip- 
pines,2 the  transfer  to  the  new  currency  basis  appears  to 
have  been  postponed  by  the  great  majority  of  merchants 
and  others  to  the  latest  date  contemplated  by  the  law.3  A 
careful  examination  of  two  Porto  Rican  daily  newspapers, 
El  Impartial  of  Mayaguez  for  the  first  month  of  the  period 
of  the  canje,  and  La  Correspondencia  of  San  Juan  for  the 
entire  period,  shows  that  up  to  August  i  practically  all  of 
the  prices  mentioned  in  the  papers  were  quoted  in  terms  of 
the  provincial  money.  There  were  numerous  complaints 
of  rising  prices  during  this  period,4  May  i  to  August  i ;  the 

1  The  American  cent  weighed  48  grains,  and  the  Spanish  centavo  (or  five- 
centimo  piece)  weighed  77.16  grains. 

2  Infra,  pp.  341-43- 

3  Formal  efforts  were  early  made  to  transfer  prices  to  the  new  basis,  but 
they  appear  to  have  been  of  little  effect.     The  newspapers  of  May  7th  and 
8th  (La  Democracia  of  Ponce  and  La  Correspondencia  of  San  Juan)  con- 
tained notices  on  this  subject  signed  by  various  merchants.     Those  of  Ponce 
declared  that  their  transactions  in  the  future  would  be  on  an  American  gold 
basis,  but  that  they  would  naturally  receive  the  provincial  silver  at  the  proper 
rate.    Those  of  San  Juan  proposed  to  give,  in  separate  price  lists,  prices  in 
United  States  currency  and  prices  in  provincial  money,  in  order  that  the  pub- 
lic might  see  that  there  was  a  difference. 

4  Examples  are :  La  Correspondencia  of  San  Juan,  May  8,  published  a  pro- 
test against  the  raising  of  the  prices  of  necessities  by  retailers,  referred  to  a 


2l6     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

cause,  however,  was  not  often  directly  attributed  to  the 
canje,  but  rather  to  the  combinations  of  retailers  and  their 
selfishness. 

On  August  i  the  old  money  ceased  to  be  legal  tender, 
and,  as  it  was  generally  expected  that  the  money  would 
not  be  received  by  the  Government  in  exchange  for  United 
States  currency  after  July  31,  the  transference  to  the  new 
basis  was  very  active  near  the  first  of  August.  Henceforth 
most  mercantile  prices  were  quoted  in  terms  of  United 
States  currency,1  and  railway  rates  were  placed  upon  the 
new  currency  basis.2  On  August  i  the  prices  of  newspapers 
were  generally  changed  to  the  new  basis,  and  we  read  in 
La  Correspondencia  for  August  3  an  announcement  of  a 
well-known  pawn  shop,  that,  although  all  its  business  up 
to  July  31  was  in  provincial  currency,  henceforward  it 
would  be  exclusively  in  United  States  currency. 

From  the  evidence  available  it  is  impossible  to  tell  to 
what  extent  the  canje  was  used  as  an  excuse  for  transferring 

combination  of  retailers,  Trust  de  Detalistas,  and  favored  the  formation  of 
a  League  of  Defense  among  consumers,  giving  notice  of  the  opening  at  its 
editorial  office  of  a  register  of  protests  which  all  classes  were  invited  to  sign. 
The  newspaper  El  Pais  is  referred  to  in  this  issue  as  favoring  a  Union  of 
Consumers;  and  a  Committee  of  Defense  against  the  exactions  of  retailers. 
La  Correspondencia  of  May  9  had  an  article  on  the  League  (Gremio)  of 
Retailers.  In  its  issue  of  May  1 1  the  same  paper  published  a  letter  from  the 
Federacion  Regional  de  Obreros  congratulating  it  on  its  campaign  against 
the  exactions  of  retailers  and  promising  the  support  of  the  Federation.  It 
advocated  the  calling  of  a  meeting  to  request  the  organization  of  consumers. 
The  issue  of  May  17  complained  against  the  rise  in  the  price  of  bread  from 
four  or  five  centavos  to  six  centavos  a  pound.  The  same  issue  referred  to 
the  plan  of  the  socialist  laborers  of  forming  in  each  barrio  a  society  of  some 
forty  members  to  combat  rising  prices  by  buying  supplies  cooperatively  in 
large  quantities.  El  Imparcial  of  May  19  referred  to  the  decision  of  the 
socialist  laborers  in  Mayagiiez  to  form  such  cooperative  groups,  and  favored 
the  organization  of  groups  of  other  laborers  to  protect  themselves  by  buying 
only  of  such  establishments  as  charge  reasonable  prices.  In  its  issue  of 
June  21  La  Correspondencia  had  an  article  on  The  Question  of  Subsistence, 
in  which  it  paid  particular  attention  to  the  rise  in  the  price  of  bread  and  the 
exorbitant  profits  being  realized  by  bakers. 

1Cf.  advertisements  in  La  Correspondencia,  Aug.  i  and  2. 

2  See  announcement,  ibid.,  July  21. 


RESULTS  OF  THE  PORTO  RICAN  CURRENCY  REFORM     217 

retail  prices  at  par  from  provincial  money  to  United  States 
money.  Many  merchants  in  their  advertisements  made  a 
virtue  of  the  claim  that  their  prices  had  all  been  transferred 
at  the  official  rate,  that  is,  reduced  by  40  per  cent.  In  some 
cases  this  claim  was  doubtless  true,  although  there  appears 
to  be  ground  for  the  suspicion  that  in  some  cases  at  least 
the  striking  advances  in  prices  in  May  and  June  were 
preparations  for  these  later  "generous  reductions."  If 
one  may  trust  the  newspaper  accounts,  there  were  many 
cases  in  which  merchants  in  converting  their  prices  to 
United  States  currency  " split  the  difference/'  making 
the  new  prices  approximately  80  per  cent  of  the  old 
ones.  The  complaints  were  very  numerous,  however, 
that  in  a  large  number  of  cases  prices  were  transferred 
to  the  new  currency  without  any  reduction  whatever. 
On  this  point  a  few  citations  from  responsible  sources 
will  suffice. 

General  Davis  wrote  in  his  annual  report  as  Military 
Governor  for  1900: 

'  The  dense  ignorance  of  80  per  cent  of  the  inhabitants  and 
their  general  helplessness  was  taken  advantage  of  by  the 
merchants,  local  bankers,  and  employers  of  Labor.  The 
poor  peon  who  had  a  few  pesos  saved  was  given  in  ex- 
change the  United  States  dollars  at  the  official  rate.  For 
P  10  he  received  $6 ;  but  the  merchant  and  tradesman 
with  whom  he  spent  his  money  would  seek  to  put  him  off 
with  as  little  codfish,  rice,  or  rum  as  he  would  have  gotten 
the  day  before  for  his  pesos." J 

The  first  Civil  Governor,  Charles  H.  Allen,  said  in  his 
first  annual  report,  dated  May  i,  1901 : 

"  Doubtless  some  sort  of  exchange  from  the  Spanish  silver 
currency  of  Porto  Rico  to  American  currency  was  necessary ; 
but  coming  just  as  it  did,  about  one  year  after  the  hurricane, 

1  Report,  p.  173. 


2l8    THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

it  proved  to  be  a  hardship  upon  the  people.  This  result 
ensued  .  .  .  from  the  fact  that  the  merchants  of  Porto 
Rico  were  slow  to  recognize  the  difference  in  value  between 
a  Porto  Rican  peso  and  an  American  dollar.  Some  of  them 
continued  to  charge  the  same  prices  for  their  goods  in 
American  money  as  they  had  previously  received  in  the  de- 
preciated currency  of  Porto  Rico.  The  fruit  venders  and 
other  peddlers  of  small  wares  could  not  be  made  to  under- 
stand that  a  Porto  Rican  medio  was  only  worth  three 
cents,  and  bakers  gave  no  larger  loaf  of  bread  for  an 
American  cent  than  for  a  Porto  Rican  centavo.  ...  So 
it  happened  that  the  greed  of  one  class  and  the  ignorance 
of  others  caused  great  friction  in  the  purchase  and  sale  of 
commodities  and  in  the  transaction  of  business.  In  fact, 
owing  to  the  peculiar  circumstances  of  the  case,  the  ex- 
change from  one  currency  to  another  amounted  for  a  time 
almost  to  the  contraction  of  the  circulating  medium  to  the 
extent  of  40  per  cent.1 

The  second  Civil  Governor  of  Porto  Rico,  William  H. 
Hunt,  in  a  letter  dated  April  i,  1902,  said : 

"  There  was  considerable  apprehension  on  the  part  of  the 
people  and  some  little  misunderstanding.  In  some  places 
storekeepers  closed  their  shops,  because  there  was  little  or 
no  American  money  to  be  had  on  August  i  in  the  partic- 
ular towns  where  such  action  was  had  and  because  they 
feared  that  Porto  Rican  money  would  only  be  taken  at  its 
bullion  value  after  that  date.  Market  people,  omnibus 
drivers,  street  venders,  storekeepers,  and  house  owners 
could  not  understand  that  the  new  American  dollar  ought 
to  have  a  greater  purchasing  power  than  the  Porto  Rican 
peso,  and  it  was  because  of  this  misunderstanding  and 
apprehension  that  on  August  i  persons  who  had  charged  a 
peso  for  an  article  asked  and  received  an  American  dollar; 
Omnibus  fares,  which  were  10  centavos  on  July  31,  were 
10  cents  on  August  i.  .  .  .  "2 

1  Report,  pp.  65-66. 

2  Quoted  in  Cong.  Rec.,  June  26, 1902,  p.  7461. 


RESULTS  OF  THE  PORTO  RICAN  CURRENCY  REFORM     219 

The  British  Consul  said  in  his  1900  report  that  the 
dollar  was  made  synonymous  with  the  peso  and  that  "there 
was  an  immediate  rise  all  round  of  66f  per  cent."  1 


Rents 

Rents  in  the  cities  appear  frequently  to  have  been  con- 
verted at  par  from  pesos  to  dollars.  As  early  as  April  28 
we  find  La  Correspondencies  advising  renters  in  San  Juan 
to  institute  a  crusade  against  the  abuse  now  becoming 
common  on  the  part  of  landlords  of  transferring  rents  to 
an  American  currency  basis  without  reduction;  while  on 
August  i  this  paper  had  an  editorial  (cited  more  fully 
later,  p.  222)  in  which  it  said  that  "the  landlords  have 
covered  in  gold  the  rent  of  the  house.  ..."  The  issue  of 
this  paper  for  August  1 2  contains  the  following  item : 
"Various  landlords  of  urban  properties  in  Arecibo  [a  city 
of  8000  population]  have  notified  their  tenants  that  after 
the  first  of  the  present  month  they  will  be  expected  to  pay 
their  rents  in  gold  to  the  same  amount  as  formerly  in  pro- 
vincial money."2  A  native  Porto  Rican,  who  at  one  time 
held  one  of  the  most  important  engineering  positions  in  the 
Island,  informed  the  writer  that  the  rents  of  several  pieces 
of  real  estate  which  he  owned  hi  San  Juan  were  converted 
to  a  gold  basis  without  reduction  at  the  time  of  the  canje, 
and  said  that  such  conversion  was  the  rule  among  the 
property  owners  with  whom  he  was  acquainted.  Governor 
Hunt  is  responsible  for  the  statement  that  "rentals  rose, 
and  a  dollar  was  exacted  after  August  i  for  every  peso 
that  had  been  collected  the  month  before."  3 

This  advance  in  rents,  it  should  be  borne  in  mind,  how- 

1  Pp.  8-^. 

2  Four  days  previously  this  same  paper  published  a  letter  saying  that 
vigorous  protests  were  being  made  against  this  proposal  of  property  owners 
in  Arecibo. 

•Letter  quoted  in  Cong.  Rec.,  June  26,  1902,  p.  7461. 


220    THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

ever,  was  one  more  step  in  an  upward  movement  that  had 
set  in  vigorously  shortly  after  the  American  occupation.1 

Wages 

The  same  forces  that  caused  the  conversion  of  numerous 
retail  prices  from  centavos  to  cents  without  change  in 
amount  tended  to  cause  a  similar  conversion  of  wages, 
while  the  fact  of  the  conversion  of  prices  was  itself  a  power- 
ful leverage  in  forcing  the  conversion  of  wages.  If  the 
peon's  customary  living  cost  as  many  cents  per  day  as  it 
formerly  cost  centavos,  and  such  was  not  far  from  the  case 
in  numerous  instances,  he  naturally  protested  vigorously 
at  any  attempt  to  scale  down  his  wages  40  per  cent.  In 
some  prosperous  lines  of  industry,  like  sugar,  which  em- 
ployed more  labor  than  any  other  industry  in  the  Island, 
the  need  for  labor  was  so  great  that  the  peon's  demands 
for  conversion  at  par  were  commonly  realized;  in  other 
lines,  as  for  example  in  the  coffee  fincas,  which  were  still 
suffering  from  the  disastrous  effects  of  the  hurricane,  the 
peon  was  not  so  fortunate.  There  were  strikes  for  conver- 
sion of  wages  at  par,  some  of  which  were  successful  and  some 
of  which  resulted  in  compromises.2  The  demands  of  labor 
were  strengthened  by  the  fact  that  the  normal  tendency  of 
wages  since  the  American  occupation  had  been  strongly 
upward.3  Said  General  Davis  in  his  1900  report  as  Military 
Governor : 

"The  employer  of  labor  who  had  been  allowing  wages  of 
50  centavos  per  day  would  only  give  30  cents  American, 

1  Cf.  British  Diplomatic  and  Consular  Report,  1900,  Porto  Rico,  p.  9. 

2  La  Correspondencia  for  August  1 2  said  that  the  coachmen's  union  of 
Ponce,  which  had  declared  a  strike,  had  returned  to  work,  having  changed  the 
schedule  of  rates ;  and  that  the  laborers  in  the  match  factory  in  Mayagtiez 
had  declared  a  strike.    The  issue  of  August  13  said  that  the  tailors'  union 
of  a  certain  small  town  had  come  to  an  agreement  after  a  strike  of  several 
days. 

3  Cf.  Senate  Hearings,  op.  cit,  p.  205. 


RESULTS  OF  THE  PORTO  RICAN  CURRENCY  REFORM     221 

which  money  at  first  had  little  or  no  more  purchasing 
power  locally  than  the  same  number  of  centavos.  It  is 
true  there  were  strikes  and  appeals  to  the  authorities  for 
justice,  but  effective  help  could  not  be  applied  by  any  one 
in  power.  Some  proprietors  did  make  concessions,  and 
about  split  the  difference  of  the  two  moneys  in  fixing  the 
wage  rate.  The  field  hand  who  had  been  getting  50 
centavos,  worth  30  cents  gold,  claimed  50  cents,  and  was 
allowed  40  cents  gold  as  a  compromise ;  but  this  was  not 
an  advance  equal  to  the  general  increase  in  price  of  almost 
all  necessaries  of  life.  The  sugar  makers  and  tobacco 
manufacturers  could  afford  to  increase  wages,  but  the  coffee 
growers  not  only  could  not  make  any  increase,  but  they  were 
all  so  greatly  embarrassed  and  damaged  by  the  loss  in  crops 
for  the  preceding  two  years  that  a  great  many  had  prac- 
tically abandoned  business.  The  wage  rate  for  labor  in 
the  coffee  fincas  had  not  only  not  increased,  but  not  more 
than  half  the  hands  accustomed  to  secure  employment  could 
get  it  at  any  wage  rate.  The  change  of  currency  has  worked 
an  injury  to  the  coffee  laborers,  for  it  has  only  caused 
confusion  and  hard  feeling  between  proprietor  and  laborer 
and  merchant."  1 

A  report  of  similar  tenor  was  made  by  the  British  Consul 
to  his  Government  in  1900.  He  said :  "  Where  the  peso 
[formerly]  was  asked  the  dollar  is  required  and  freely 
granted  in  the  case  of  English-speaking  domestics,  all  of 
whom  are  colored.  .  .  .  Labor  of  all  sorts  in  the  town 
and  port  demanded  and  generally  obtained  a  similar  rise 
but  not  without  a  series  of  strikes."  The  Consul  also 
pointed  out  that  in  the  interior  wages  did  not  rise  in  the 
same  proportion,  and  that  in  some  districts,  especially 
those  suffering  most  from  the  hurricane,  they  did  not  rise 
at  all.2 

La  Correspondencies  of  August  i,  1900  had  an  editorial 
under  the  title  Consumatum  Est,  which  said  in  part : 

1  Davis.  Report,  1900,  pp.  173-74. 

2  British  Diplomatic  and  Consular  Reports,  1900,  Porto  Rico,  p.  9. 


222     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

"The  clamorous  canje  has  been  effected.  .  .  .  We  have 
exchanged  the  pen  as  for  the  plumed  Indians.  We  ought 
to  be  satisfied.  ...  It  is  true  that  the  landlords  have 
covered  in  gold  the  rent  of  the  house,  the  cook  refuses  to 
season  the  olla  unless  we  give  her  in  gold  what  she  formerly 
earned  in  silver,  the  washwoman  demands  the  same  pay 
in  gold  for  the  washing;  .  .  .  and,  since  the  incomes  of 
most  people  have  not  increased,  the  result  is  a  deficit  in  the 
household  budget.  .  .  .  One  of  the  great  arguments  for 
the  canje  was  that  it  would  reduce  the  cost  of  living,  which 
was  becoming  very  high  in  Porto  Rico.  The  result,  how- 
ever, has  been  that  we  are  paying  double  for  all  classes  of 
service,  many  provisions  are  dearer,  and  others  are  the 
same,  but  nothing  has  fallen." 

An  interesting  illustration  of  how  some  of  the  wage  ad- 
vances worked  appears  in  a  railroad  announcement  in 
La  Correspondencia  of  August  6 : 

"To  the  public.  Although  the  entire  personnel  of  this 
enterprise  will  be  paid  from  the  ist  of  August  forward  a 
dollar  gold  for  each  provincial  peso  formerly  paid,  and 
accordingly  it  would  be  equitable  for  us  to  convert  freight 
and  passenger  rates  in  the  same  manner,1  nevertheless, 
being  attentive  to  the  manifestations  of  the  public,  we  have 
resolved  to  reduce  rates,  beginning  with  to-morrow,  accord- 
ing to  the  following  schedule :  .  .  ." 

But  these  rate  reductions  appear  to  have  been  nothing 
like  sufficient  to  compensate  for  the  increased  value  of 
the  monetary  unit.  For  example,  it  was  pointed  out2 
that  from  Bayamon  to  Viga  Baja  the  third-class  rate 
was  formerly  70  centavos,  and  the  new  rate  63  cents, 
whereas  a  reduction  proportionate  to  the  increased  value 
of  the  dollar  would  have  given  a  rate  of  46  cents. 

1  Note  the  false  implication  that  all  expenses  rose  in  proportion  to  the 
increase  in  wages. 

2  La  Correspondencia,  Aug.  12. 


RESULTS  OF  THE  PORTO  RICAN   CURRENCY  REFORM    223 

Were  the  Price  and  Wage  Changes  Permanent? 

It  is  customary  to  think  of  changes  in  prices  and  wages 
resulting  from  the  introduction  of  a  new  unit  of  value  as 
merely  nominal,  except  for  a  few  temporary  maladjust- 
ments —  friction  points,  as  it  were,  in  a  new  exchange 
mechanism  quickly  to  be  worn  off  by  use.  Even  if  these 
maladjustments  were  but  temporary,  it  should  not  be  over- 
looked that  the  losses  (and  gains)  resulting  from  them  may 
have  been  very  real  and  permanent.  A  peon  on  a  coffee 
plantation  whose  wages  of  Pi5  a  month  were  reduced  to 
$9  as  the  result  of  the  canje,  and  who  found  the  prices  of 
the  goods  he  bought  unchanged,  irrecoverably  lost  40  per 
cent  of  his  monthly  wage ;  and  his  loss  was  repeated  each 
month  until  there  was  a  readjustment  through  an  increase 
in  his  wage,  a  reduction  in  prices,  or  both.  This  ultimate 
readjustment,  however,  no  matter  how  perfect,  did  not  re- 
store his  lost  money  nor  blot  out  such  evil  results  as  the 
impairment  of  his  health  or  that  of  his  family,  strikes,  and 
destruction  of  property  l  with  resulting  hard  feelings  be- 
tween employer  and  laborers. 

In  this  particular  reform,  however,  it  appears  that 
many  of  the  supposedly  temporary  price  and  wage  changes 
persisted  —  at  least  in  part.  The  advances  took  place  at 
a  time  when  the  tendency  of  both  general  prices  and  wages, 
for  other  causes,  was  upward ;  and  the  reform  anticipated 
and  hastened  price  and  wage  changes  that  were  destined 
soon  to  take  place  anyway.  On  this  subject  Governor 
William  H.  Hunt  said  in  a  letter  dated  April  i,  1902  : 

1  In  a  hearing  conducted  by  Mr.  Carroll,  January  14,  1899  (Carroll, 
pp.  468-69),  the  following  question  and  answer  appeared:  "Dr.  Carroll  — 
Do  you  think  that  you  will  not  be  able  to  induce  your  peons  to  continue  their 
work  by  explaining  to  them  that  they  can  buy  as  much  with  the  gold  as  they 
could  with  the  nominally  larger  amount  of  silver  ?  "  Mr.  Huicy  [a  member  of 
the  municipal  council  of  Arecibo]  —  "We  will  have  to  try  it,  but  the  chances 
are  that  we  will  not  succeed  and  they  will  strike,  and  strikes  mean  fires. 
There  have  been  two  instances  here  of  that.  On  two  estates  they  cut  down 
wages  10  cents  and  that  same  day  the  two  estates  were  burned." 


224     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

"Naturally,  business  was  much  disturbed  for  a  short 
time,  but  the  disturbed  conditions  were  soon  adjusted  with 
some  relation  to  American  money.  I  think  it  can  be  safely 
said,  however,  that  there  never  has  been,  in  all  respects, 
an  entire  readjustment;  rents,  for  instance,  never  having 
gone  back  to  what  they  were  prior  to  August  i,  1900. 
Wages  are  somewhat  higher  than  they  were  prior  to  that 
time,  but,  generally  speaking,  all  prices  have  risen  in  Porto 
Rico  within  the  past  eighteen  months,  as  all  conditions  have 
much  improved."  1 

Of  similar  purport  is  the  statement  of  the  after  effects 
of  the  canje  made  by  De  Ford  &  Co.,  at  that  time  one  of 
the  leading  banking  houses  in  Porto  Rico,  in  a  letter  to 
Mr.  Charles  A.  Conant,  dated  August  2,  1901. 

It  is  as  follows : 

"The  immediate  effect  of  our  advertised  intention  to  re- 
tire the  old  currency  was  a  very  general  raising  of  prices 
and  a  demand  for  the  raising  of  wages  among  the  smaller 
merchants,  retailers,  and  workingmen.  This  lasted  but  a 
short  time,  however,  and  the  prices  of  staple  commodities,  as 
well  as  the  price  of  labor,  have  since  worked  back  toward 
the  old  basis,  steadily  but  surely.  To-day  we  believe  that 
a  conservative  opinion  would  say  that  the  change  in  the 
currency  is  perhaps  responsible  for  a  rise  in  the  cost  of  liv- 
ing of  from  i  o  to  15  per  cent.  In  some  parts  of  the  Island 
it  is  much  higher,  owing  to  combinations  of  capitalists,  but 
these  will  undoubtedly  be  dissolved  in  time.'7 

1  Letter  is  printed  in  Cong.  Rec.,  June  26,  1902,  p.  7461. 

2  Quoted  by  Charles  A.  Conant  in  his  Special  Report  on  Coinage  and 
Banking  in  the  Philippines,  p.  119. 


CHAPTER  VI 

COULD  THE  PLAN  FOR  CONVERTING  PORTO  RICAN  CUR- 
RENCY INTO  UNITED  STATES  CURRENCY  HAVE  BEEN 
IMPROVED  ? 

ONE  of  the  motives  in  studying  a  currency  reform  like 
that  of  Porto  Rico  is  to  get  from  it  lessons  for  the  future. 
Many  currency  reforms  will  doubtless  be  carried  through 
during  the  present  generation,  especially  reforms  in  the 
Orient,  in  South  America,  and  in  Africa.  If  mistakes  have 
been  made  in  recent  reforms  it  is  well  to  know  them  so  as  to 
avoid  similar  ones  in  the  future.  Many  things  are  known 
to  the  student  of  Porto  Rican  currency  to-day  that  were 
not  known  to  those  who  were  responsible  for  the  reform  of 
1900,  and  the  discussion  which  follows  seeks  to  draw  lessons 
for  the  future,  not  to  criticize  actions  of  the  past.  In  the 
light  of  present  knowledge,  how,  if  at  all,  should  the  reform 
program  of  1900  have  been  changed? 

The  Rate  of  Canje 

In  view  of  the  resulting  price  and  wage  disturbances  was 
the  6o-cent  rate  of  conversion  a  wise  one  ?  Particular  atten- 
tion was  paid,  in  the  discussions  of  1899  and  1900  concerning 
the  proper  rate,  to  the  question  of  justice  to  debtors  and 
creditors  and  to  the  holders  of  the  provincial  money.  To 
secure  approximate  justice  for  these  classes  it  was  sought  to 
find  a  rate  that  was  substantially  in  harmony  with  the  gold 
value  of  the  provincial  money  during  the  years  immediately 
preceding.  On  this  basis  60  cents  gold  was  decided  upon, 

Q  225 


226     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

and  seemed  to  be  a  rate  that  conformed  reasonably  well 
with  the  criterion  of  justice  generally  held.  The  carrying 
out  of  the  reform,  however,  brought  into  prominence  certain 
results  whose  importance  had  been  greatly  underestimated 
in  the  earlier  discussions  —  results  in  the  form  of  malad- 
justments in  retail  prices,  rents,  and  wages.  Would  a  fore- 
knowledge of  the  character  and  importance  of  these  results 
have  called  for  a  different  rate  ? 

If  a  conversion  rate  of  60  cents  to  the  peso  resulted  in  a 
temporary  transference  of  numerous  prices  and  wages  at 
par  from  pesos  to  dollars,  it  would  seem  probable  that  such 
would  have  been  the  case  with  any  higher  rate  up  to  par, 
and  that  the  tendency  to  convert  prices  and  wages  at  par 
(that  is,  to  the  same  number  of  dollars  and  cents  United 
States  currency  that  they  formerly  were  in  provincial  cur- 
rency) would  have  been  stronger  somewhat  in  proportion 
as  the  rate  were  higher.  The  fact  that  the  sizes  of  the  old 
coins  and  the  new  ones  were  approximately  the  same  (ex- 
cept the  centavo  and  5-centavo  pieces)  would  have  tended 
to  cause  the  masses  to  look  upon  them  as  equivalent,  re- 
gardless of  their  gold  value,  and  to  demand  par  rates. 
The  nearer  the  actual  conversion  rate  came  to  par  the 
weaker  would  be  the  resistance  of  those  paying  the  prices, 
the  wages,  and  the  rents  to  demands  for  the  payment  of  par 
rates  in  the  new  currency.  A  higher  gold  rate  than  60  cents, 
such  as  70  cents,  80  cents,  or  90  cents,  therefore,  would  not 
have  caused  any  conversions  above  par,  but  would  probably 
have  increased  the  number  of  conversions  at  par.  The 
latter  result  would  have  been  truer  of  wages,  where  the 
amounts  involved  were  relatively  large,  than  of  retail 
prices  where  the  amounts  were  often  very  small.  It  is 
doubtful  whether  the  immediate  result  as  regards  prices 
of  native  supplies  bought  in  amounts  not  exceeding  a 
few  cents'  worth  would  have  been  much  different  with 
a  go-cent  rate  than  it  was  with  a  6ocent  rate. 

Carrying  this  same  principle  in  the  other  direction,  how- 


REFORM  PLAN  CRITICALLY  EXAMINED  227 

ever,  a  point  would  have  been  reached  somewhere  at  which 
conversions  at  par  would  be  difficult,  despite  the  pressure, 
because  the  amounts  involved  would  have  been  so  large. 
A  6o-cent  rate  might  result  in  numerous  conversions  at 
par,  but  how  about  a  45-cent  rate  (i.e.  approximately  the 
bullion  rate  favored  by  some),  or  even  a  35-cent  rate  ?  At  a 
35-cent  rate  it  is  difficult  to  believe  that  there  would  have 
been  many  conversions  at  par.  That  would  have  meant 
bankruptcy  to  employers;  and,  in  the  cases  where  there 
was  not  a  great  increase  in  his  gold  wages,  starvation  to  the 
laborer  who  was  compelled  to  pay  as  many  dollars  and 
cents  for  his  supplies  as  he  formerly  had  paid  pesos  and 
centavos. 

At  what  rate  then  would  the  most  perfect  immediate 
adjustment  have  taken  place?  The  answer  to  this  ques- 
tion, I  believe,  is  the  5o-cent  rate ;  for  at  that  rate  prices 
would  have  tended  to  break  exactly  in  two.  Two  to  one 
is  easily  thinkable,  and  the  average  peon  would  have  under- 
stood it,  likewise  the  petty  merchant  and  storekeeper. 
There  would  have  been  friction  and  dispute ;  but  of  all  rates 
that  would  have  even  approximated  justice  between  debtor 
and  creditor  a  5o-cent  rate  would  probably  have  caused 
the  least  temporary  disturbance  to  existing  price  and  wage 
standards. 

This  advantage,  however,  would  have  been  bought  at  the 
expense  of  scaling  down  debts  by  about  i6f  per  cent  in 
gold  values  from  the  rate  which  appeared  most  equitable.1 
Possibly  the  advantage  would  have  been  worth  the  expense 
in  view  of  the  oppressive  burdens  the  debtors  had  been 
carrying,  and  of  the  claim  that  in  Porto  Rico  the  debtors 
were  the  more  productive  classes.  There  are  strong  argu- 
ments on  both  sides  of  this  suggestion  of  a  5o-cent  rate. 

Fortunately,  however,  it  is  not  necessary  to  try  to  weigh 
them  and  to  find  on  which  side  the  balance  of  advantage 

1  Another  objection  would  have  been  the  conversion  of  cash  holdings  at 
an  unduly  low  gold  rate. 


228     THE  PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

lies ;  for  there  is  another  proposal  which  would  have  had 
the  advantages  without  the  disadvantages  of  a  5o-cent  con- 
version plan. 

Suggested  Improvements  in  Reform  Plan 

That  proposal  is  analogous  to  the  plan  originally  contem- 
plated,1 of  effecting  the  reform  slowly  and  introducing  dur- 
ing the  transition  period  Porto  Rican  coins  with  American 
designs.  As  intimated  in  the  preceding  discussion,  the  argu- 
ments in  favor  of  a  speedy  transition  to  an  exclusively 
United  States  currency  basis  had  little  weight.2  That  the 
alleged  danger  of  counterfeiting  was  not  serious  was  proved 
by  the  fact,  that,  after  nearly  a  year  and  a  half,  under  the 
American  regime,  of  an  official  rate  of  60  cents  to  the  peso, 
giving  it  a  value  of  from  35  to  40  per  cent  in  excess  of  its 
bullion  value,  there  was  no  evidence  of  any  appreciable 
amount  of  counterfeiting,3  and  by  the  fact  that  the  Treasury 
agents  in  withdrawing  the  old  currency  from  circulation 
secured  considerably  less  money  than  the  estimated  amount 
in  circulation.4  An  efficient  police  service  and  an  honest 
customs  service  would  have  been  guarantees  against  any 
such  danger  had  it  arisen.  Furthermore,  the  profits  to  be 
realized  from  counterfeiting  United  States  silver  coins 
would  have  been  greater  than  from  counterfeiting  the  Porto 
Rican  coins.  The  receipt  of  both  kinds  of  currency  at  the 
official  rate  for  all  taxes  and  public  dues,  and  the  ready 
interchange  of  both  kinds  for  the  public  by  various  govern- 
ment fiscal  officers  at  convenient  places,  would  have  pre- 
vented the  market  rate  of  exchange  from  varying  from  the 
official  rate,  and  removed  the  alleged  danger  of  speculation. 

1  Supra,  pp.  194-95- 

2  Supra,  p.  198. 

3  The  writer  found  in  the  Porto  Rican  newspapers  but  one  reference  to  the 
counterfeiting  of  coins,  and  the  counterfeiter  in  that  case  was  making  both 
provincial  and  United  States  coins.    Cf.  La  Correspondencia,  July  13, 1899. 

4  Supra,  pp.  165  and  204. 


REFORM   PLAN   CRITICALLY  EXAMINED  229 

The  alleged  inconveniences  of  the  dual  currency  during 
the  latter  part  of  1899  and  the  fore  part  of  1900  the  writer 
believes  to  have  been  greatly  exaggerated  in  the  reports 
that  reached  the  United  States.  Brigadier  General  Davis, 
the  Military  Governor,  said  as  late  as  September  30,  1899, 
in  his  annual  report  of  that  year : 

"As  respects  the  volume  of  American  money  now  circu- 
lating [in  the  Island],  it  is  impossible  to  furnish  a  satisfactory 
estimate.  Although  the  army  disbursements  in  the  Island 
have  been  several  millions,  it  is  believed  that  most  of  it  has 
been  sent  back  to  the  United  States.  It  came  usually  in 
bills,  a  form  convenient  for  cheap  conveyance  and  trans- 
mission by  post.  Merchants  and  others  wishing  to  remit 
to  New  York  or  Europe  are  in  the  habit  of  buying  American 
currency  and  sending  the  same  to  New  York  in  registered 
letters,  buying  there  European  exchange  for  such  amounts 
as  they  may  wish  to  remit  to  London,  Paris,  or  Madrid. 
Bank  bills  are  therefore  at  a  premium  over  American  gold, 
for  the  latter  can  only  be  shipped  by  express  at  much  greater 
cost  than  the  postage  or  registration  expenses  of  parcels  by 
mail.  .  .  .  The  army  disbursements  amount,  approxi- 
mately, to  $200,000  per  month,  but  this  money  inevitably 
drifts  into  the  banks  and  does  not  go  into  circulation.  The 
estimated  amount  of  American  money  now  in  the  bank 
vaults  is  $253,598.98,  as  shown  by  data  recently  obtained 
from  the  cashiers."  1 

It  was  the  few  Americans  in  the  Island  who  felt  most 
the  inconveniences  of  the  dual  currency,  and  they  were  the 
ones  whose  opinions  were  heard  in  the  United  States. 
Even  for  them  the  inconveniences  were  of  declining  im- 
portance, since  the  natives  were  slowly  becoming  more  and 
more  familiar  with  the  relative  values  of  the  two  currencies. 
The  great  bulk  of  the  native  transactions,  even  down  to  the 
latter  part  of  July  1900,  were  on  a  provincial  currency 
basis,  and  most  natives  had  little  to  do  with  United  States 

1  Report,  p.  506. 


230    THE  PORTO  RICAN   CURRENCY  REFORM  OF   1899-1900 

money.1  Such  Porto  Rican  newspapers  for  1899  and  1900 
as  the  writer  has  examined  contain  very  few  references  to 
inconveniences  arising  from  the  dual  currency.  There  was 
much  discussion  of  the  need  of  free  trade  between  Porto 
Rico  and  the  United  States;  but  aside  from  occasional 
references  concerning  discussions  of  Porto  Rican  affairs  in 
the  United  States  Congress,  notes  on  certain  fiscal  matters 
of  the  Military  Government  in  Porto  Rico,  and  advertise- 
ments of  American  concerns  in  the  United  States  quoting 
gold  prices,  the  newspaper  reader  would  scarcely  have 
known  that  there  was  any  currency  in  Porto  Rico  except 
the  provincial  currency.  There  was  certainly  no  evidence 
that  the  inconveniences  of  the  dual  currency  to  the  Porto 
Ricans  were  such  as  to  make  an  early  and  hurried  reform 
urgent. 

The  main  outlines  of  the  plan  which  the  writer  believes 
should  have  been  adopted  are  as  follows :  The  official  rate 
of  60  cents  should  have  been  early  declared,  and  both  kinds 
of  currency  should  have  been  made  legal  tender  and  re- 
ceivable for  public  dues  at  this  rate.  A  new  Porto  Rican 
centavo  and  lo-centavo  piece  would  then  have  been  coined 
bearing  United  States-Porto  Rican  designs,  being  made 
similar  in  size  and  form  to  the  corresponding  Spanish-Porto 
Rican  coins,  but  made  easily  distinguishable  from  the 
American  cent  and  dime.  These  coins  would  have  been 
minted  in  liberal  quantities  and  generously  circulated 
throughout  the  Island.  After  a  time  they  would  have  been 
gradually  substituted  in  the  circulation  for  all  the  provincial 
coins  of  denominations  below  the  peso.  Meanwhile  United 
States  currency  would  have  continued  to  be  placed  in 
circulation,  and  its  use  in  every  way  encouraged.  There 
would  have  been  a  ready  interchange  at  numerous  exchange 

1  "The  peso  and  centavo  are  still  the  money  of  the  people,  and  no  great 
progress  has  been  made  in  displacing  them.  Our  currency,  having  the  value 
of  gold,  is  still  an  article  of  merchandise."  Davis,  Ann.  Rep.,  1899  (Sept.  30), 
P-  SO?- 


REFORM  PLAN  CRITICALLY  EXAMINED  231 

offices  of  these  new  coins  with  pesos,  and  with  United 
States  money,  especially  of  small  denominations,  at  the 
official  rate.  In  this  way  the  masses  of  the  people,  i.e. 
those  most  ignorant  and  prejudiced  in  money  matters, 
would  have  become  accustomed  to  American-Porto 
Rican  coins  of  the  denominations  which  they  most  used, 
and  with  their  correct  values  in  relation  to  United  States 
money.  The  objection  to  coining  other  new  fractional 
pieces  than  the  centavo  and  lo-centavo  pieces  would  have 
been  the  expense  and  the  undesirability  of  making  the  pro- 
vincial system  so  convenient  as  to  encourage  its  permanence. 
It  is  doubtful  whether  it  would  have  been  wise  to  coin  the 
American-Porto  Rican  peso  piece  which  was  so  often  pro- 
posed. The  existing  peso  was  a  new  one  and  was  in  a  good 
state  of  preservation.  The  fact  that  it  bore  the  Spanish 
emblems  would  not  have  been  serious  if  it  were  understood 
that  its  circulation  was  to  be  continued  only  a  short  time. 
Any  inconvenience  from  a  scarcity  of  pesos  could  have  been 
met  by  the  use  of  the  United  States  currency  equivalent, 
i.e.  60  cents ; l  and,  if  Congress  would  have  authorized  it, 
by  the  introduction  of  a  silver  certificate  representing  three 
dollars  or  five  pesos,  and  payable  on  demand  in  either  form 
at  the  option  of  the  holder  in  San  Juan.  Such  certifi- 
cates, if  issued  in  convenient  sizes  similar  to  those  issued  in 
1903  in  the  Philippines,  would  almost  certainly,  as  in  the 
Philippines  and  in  the  Straits  Settlements,  have  become 
popular,  and  would  have  rendered  great  assistance  in  the 
work  of  gradually  withdrawing  the  peso  pieces  from  circu- 
lation. The  smaller  denominations  left  in  circulation  then 
(after  the  pieces  of  2,  5,  20,  and  40  centavos  had  first 
been  gradually  withdrawn)  would  have  been  as  follows, 

1  There  should  have  been  brought  to  the  Island  an  ample  supply  of  50- 
cent  pieces,  and  their  use  should  have  been  encouraged.  Doubtless  in  some 
cases  this  piece  alone  would  have  proven  a  substitute  for  the  peso,  resulting 
in  a  reduction  in  prices ;  while  in  many  others  it  would  have  been  received 
with  the  American  dime  (together  making  60  cents)  as  a  substitute  for  the 
peso. 


232     THE  PORTO  RICAN   CURRENCY  REFORM  OF    1899-1900 


viewed  from  the  standpoint  of  the  dollar  unit  and  of  the  peso 
unit  respectively : 


DOLLAR 

NAME 

PESO 

0.006 

Centavo 

O.OI 

O.OI 

Cent 

o.oif 

0.06 

10  Centavos 

O.IO 

O.IO 

Dime 

o.i6f 

0.25 

Quarter 

0.41! 

0.50 

Half  dollar 

0.83^ 

0.60 

Peso 

I.OO 

1.  00 

Dollar 

i.66f 

2.OO 

2  dollars 

3-331 

3.00 

5  pesos 

5.00 

From  the  above  it  will  be  seen  that  the  provincial  pieces 
(above  the  centavo)  would  have  fitted  conveniently  and 
without  fractions  into  the  United  States  currency  system, 
and  the  use  of  this  system  would  have  been  encouraged ; 
while  the  United  States  currency  pieces  (with  the  excep- 
tion of  the  $3.00  —  P  5.00  silver  certificate  suggested) 
would  have  required  awkward  fractions  to  express  their 
values  in  provincial  money,  the  money  which  was  to  be 
discriminated  against. 

Under  such  a  plan,  and  the  steady  and  tactful  encourage- 
ment of  the  use  of  United  States  currency,  the  so-called 
dual  system,  within  a  couple  years,  would  have  become  a 
single  one,  and  the  pieces  of  i-centavo,  lo-centavos,  i-peso, 
and  5-pesos  would  have  become  practically  denomina- 
tions of  United  States  currency,  i.e.  6-mills,  6-cents, 
6o-cents,  and  3 -dollars  respectively,  the  other  denomi- 
nations of  provincial  money  having  been  withdrawn  from 
circulation.  The  result  would  have  been  accomplished 
slowly  and  almost  imperceptibly,  and  there  would  have  been 
little  disturbance  to  retail  prices,  wages,  and  rents.  The 
expense  would  have  been  very  small.  As  soon  as  this  result 


REFORM  PLAN  CRITICALLY  EXAMINED  233 

was  accomplished,  the  remaining  Porto  Rican  coins  of  the 
provincial  system  could  likewise  have  been  slowly  with- 
drawn from  circulation,  through  their  receipt  for  customs 
dues  and  internal  revenue  taxes. 

Before  any  attempt  was  made  to  withdraw  the  centavo 
piece  from  circulation,  it  would  have  been  wise  to  make  a 
modification  of  the  American  system  for  Porto  Rico,  i.e. 
to  introduce  an  American  |-cent  piece  —  a  coin  for  many 
years  (1792-1857)  legally  coined  in  the  United  States.  For 
a  country  like  Porto  Rico  the  American  cent  is  too  large  a 
denomination  for  the  smallest  coin.  It  is  nearly  twice  as 
valuable  as  the  centavo,  and  its  large  value  probably  adds 
materially  to  the  cost  of  living  of  the  masses.  Many  an 
article  costs  a  cent  that  would  cost  only  a  half  cent,  were 
there  such  a  coin  in  circulation,  and  many  an  article  costs 
2  cents  that  would  cost  only  i£  cents.  In  fact  when  the 
United  States  substituted  an  American  cent  for  the  centavo 
as  the  minimal  denomination  of  Porto  Rican  currency  it 
withdrew  from  circulation  the  most  important  single  coin 
of  the  poorer  people  of  the  Island.  The  substitution  of 
the  |-cent  for  the  centavo,  giving  12  half -cent  pieces  for  10 
centavos,  would  have  been  a  real  improvement  in  the 
American  system  for  Porto  Rico,  and  while  it  doubtless 
would  have  caused  some  temporary  disturbance,  the  ten- 
dency would  have  been  strongly  in  the  direction  of  favor- 
ing the  peon,  for  it  is  very  probable  that  the  J-cent  piece 
would  have  attained  practically  the  same  purchasing  power 
which  the  centavo  previously  had. 


APPENDIX  A 


PORTO  RICAN  EXCHANGE  RATES  ON  NEW  YORK  CITY, 
AND  THE  EXCHANGE  AND  BULLION  VALUES  OF 
THE  MEXICAN  PESO  IN  TERMS  OF  UNITED  STATES 
CURRENCY,  MONTHLY,  1890-95 


EXCHANGE 

BULLION 

EXCHANGE 

BULLION 

VALUE  OF 

VALUE  OF 

VALUE  OF 

VALUE  OF 

PESO1 

PESO 

PESO 

PESO 

DATE 

U.S. 

DATE 

U.S. 

Rate 

Cur- 

Rate 

Cur- 

Per 

rency 

High 

Low 

Per 

rency 

High 

Low 

Cent 

Equiv- 

Cent 

Equiv- 

alent 

alent 

cts. 

cts. 

cts. 

cts. 

cts. 

cts. 

1890  Jan. 

21 

82.6 

77-3 

76.0 

1891  Jan. 

2lf 

82.1 

84.0 

80.7 

Feb. 

24 

80.6 

76.9 

75-3 

Feb. 

21* 

82.5 

80.5 

76.6 

Mar. 

23 

8i-3 

74-4 

75-4 

Mar. 

20* 

83-2 

78.0 

76.9 

April 

24 

80.6 

82.7 

75-6 

April 

2O 

83.3 

77-5 

75-6 

May 

27 

78.7 

81.8 

79.2 

May 

20* 

83.0 

77-7 

76.2 

June 

28 

78.1 

84-4 

76.7 

June 

2ll 

82.5 

79.2 

76.2 

July 

26 

79-4 

87.6 

81.9 

July 

21* 

82.3 

79-9 

78.6 

Aug. 

20 

83-3 

93-8 

87-4 

Aug. 

21* 

82.3 

79-4 

77-6 

Sept. 

14 

87.6 

94.1 

86.1 

Sept. 

21* 

82.3 

78.0 

77.1 

Oct. 

16 

86.1 

88.7 

82.9 

Oct. 

Sif 

2.1 

77-5 

75-9 

Nov. 

16 

86.1 

84.0 

77-5 

Nov. 

21* 

82.3 

75-9 

7S-o 

Dec. 

18 

84-7 

85.6 

81.4 

Dec. 

21* 

82.3 

76.2 

7S-o 

Year,  average 

«i 

82.3 

83.2 

Year,  average 

«A 

82.5 

77-6 

1  Exchange  rates  express  premiums  in  terms  of  percentages.  For 
example,  a  rate  of  21  means  that  121  pesos  were  required  to  buy  a  sight  draft 
on  New  York  for  $100. 

Rates  for  the  year  1890  were  furnished  by  Fritz  Lundt  &  Co.,  Bankers, 
of  Mayagiiez,  Porto  Rico,  and  refer  to  the  first  of  each  month.  Rates  for 
the  years  1891-95  were  furnished  by  the  Spanish  Bank  of  Porto  Rico,  and 
are  the  prevailing  rates  for  each  month.  Cf .  Carroll,  pp.  473  and  479. 

235 


236     THE   PORTO  RICAN   CURRENCY  REFORM  OF    1899-1900 

PORTO  RICAN  EXCHANGE  RATES  —  Continued 


EXCHANGE 

BULLION 

EXCHANGE 

BULLION 

VALUE  OF 

VALUE  OF 

VALUE  OF 

VALUE  OF 

PESO 

PESO 

PESO 

PESO 

DATE 

U.S. 

DATE 

U.S. 

Rate 

Cur- 

Rate 

Cur- 

Per 

rency 

High 

Low 

Per 

rency 

High 

Low 

Cent 

Equiv- 

Cent 

Equiv- 

alent 

alent 

cts. 

cts. 

cts. 

cts. 

ctt. 

cts. 

1892  Jan. 

21 

82.6 

75-4 

71.9 

1894  Jan. 

41 

70.9 

54-7 

52.5 

Feb. 

22 

82.0 

72.2 

70.8 

Feb. 

44 

69.4 

52.9 

47-4 

Mar. 

22 

82.0 

71.7 

67.2 

Mar. 

49 

67.I 

48.0 

46.5 

April 

23* 

8l.6 

69.1 

67.6 

April 

5o£ 

66.7 

50.6 

48.4 

May 

25 

80.0 

69.5 

68.4 

May 

49s 

66.9 

50-4 

48.3 

June 

a6| 

79.0 

70.8 

69.0 

June 

Sol 

66.4 

49.8 

48.8 

July 

28 

78.1 

69.3 

67.3 

July 

52! 

65.6 

49.8 

49-7 

Aug. 

31 

76.3 

67-3 

65-2 

Aug. 

60 

62.5 

52.5 

49-4 

Sept. 

3i* 

76.0 

66.0 

65-7 

Sept. 

61 

62.1 

52.1 

50-3 

Oct. 

32| 

75-5 

68.2 

65.7 

Oct. 

54* 

64.7 

50.9 

49.8 

Nov. 

29 

77-5 

67.6 

66.7 

Nov. 

55f 

64.2 

50-5 

48.9 

Dec. 

3i 

73-3 

67-5 

65-4 

Dec. 

561 

63-8 

49.1 

46.8 

Year,  average 

26f 

78.8 

68.5 

Year,  average 

5*A 

65-8 

49-8 

1893  Jan. 

3° 

76.9 

66.4 

65.7 

1895  Jan. 

57! 

63-4 

47-3 

46.8 

Feb. 

28 

78.1 

66.3 

6S-9 

Feb. 

82 

54-9 

47-7 

46.9 

Mar. 

28 

78.1 

66.1 

64.7 

Mar. 

62 

61.7 

51.2 

47.6 

April 

32 

75-8 

66.0 

65-5 

April 

63 

61.3 

53-2 

5i-S 

May 

32* 

75-5 

66.4 

64.8 

May 

66£ 

60.1 

S3-2 

52.0 

June 

40 

71.4 

66.7 

52.5 

June 

7i 

58.5 

52.9 

52.0 

July 

42! 

70.2 

59-9 

55-3 

July 

72^ 

58.0 

52.7 

52.0 

Aug. 

42 

70.4 

60.1 

56.3 

Aug. 

73 

58.0 

52-6 

52.1 

Sept. 

4*1 

70.7 

59-4 

58.3 

Sept. 

7o| 

58.7 

52-6 

52.4 

Oct. 

41 

70.9 

58.8 

54-3 

Oct. 

7i 

58.5 

54-o 

52.7 

Nov. 

42 

70.4 

56.4 

54-3 

Nov. 

66 

60.2 

53-4 

52.7 

Dec. 

42^ 

70.2 

55-7 

54-7 

Dec. 

58 

63-3 

52-9 

5i-7 

Year,  average 

36H 

73-i 

61.4 

Year,  average 

67f 

61.1 

51-5 

APPENDIX  B 


EXCHANGE  AND  BULLION  VALUES  OF  PORTO  RICAN  PESO 
IN  TERMS  OF  UNITED  STATES  CURRENCY  MONTHLY, 
i 896- i goo1 


DATE 

EXCHANGE  VALUE 

BULLION  VALUE 

High 

Low 

High 

Low 

1896 

Jan. 

67.1 

65-8 

48.9 

48-4 

Feb. 

66.7 

65.7 

50.0 

48.9 

Mar. 

66.2 

65.7 

50.0 

49-3 

Apr. 

67.4 

66.7 

49.4 

48.8 

May 

63-3 

61.7 

49-5 

49.1 

June 

63-3 

62.5 

50.0 

49.4 

July 

62.9 

61.4 

49.9 

49.8 

Aug. 

62.5 

61.4 

49-7 

48.2 

Sept. 

62.9 

61.6 

48.7 

47-6 

Oct. 

62.5 

60.6 

48.1 

47.2 

Nov. 

61.6 

60.2 

48.9 

47.2 

Dec. 

62.1 

60.6 

47-6 

47-3 

Year 

67.4 

60.2 

50.0 

47-2 

1897 

Jan. 

62.5 

61.7 

47-3 

47.1 

Feb. 

61.6 

61.0 

47.2 

47.1 

Mar. 

59-9 

58.8 

47.0 

44-9 

Apr. 

59-5 

58.8 

45-2 

44-7 

May 

60.2 

58.8 

44-7 

43-6 

June 

59-5 

58.8 

44-o 

43-6 

July 

57-8 

57-i 

43-9 

41.8 

Aug. 

56.9 

56.5 

42.0 

37-6 

Sept. 

57-9 

S7-o 

43-2 

37-6 

1  The  exchange  value  of  the  peso  has  been  computed  from  sterling  ex- 
change rates  for  demand  paper  furnished  the  writer  by  Frank  M.  Welty, 
Vice  President  and  Cashier  of  the  American  Colonial  Bank  of  Porto  Rico. 

The  bullion  values  of  the  peso  have  been  computed  from  the  figures 
for  the  London  price  of  British  standard  silver  published  by  Pixley  and 
Abell,  Brokers,  London.  United  States  currency  equivalents  of  sterling 
prices  have  been  computed  on  the  basis  of  $4.8665  to  the  pound  sterling. 

237 


238     THE  PORTO   RICAN   CURRENCY  REFORM   OF   1899-1900 


EXCHANGE  AND  BULLION  VALUES  —  Continued 


DATE 

EXCHANGE  VALUE 

BULLION  VALUE 

High 

Low 

High 

Low 

1897  —  continued 

r~ 
fch 

Oct. 

58.2 

56.7 

43-6 

40-5 

Nov. 

61.0 

59-8 

43-6 

41.8 

Dec. 

58-5 

57-i 

44.0 

41.1 

Year 

62.5 

56.5 

47-3 

37-6 

1898 

Jan. 

57-8 

57-0 

42.6 

41.4 

Feb. 

57-8 

56.6 

41.6 

40.6 

Mar. 

56.8 

55-5 

41-3 

39-5 

Apr. 

52.7 

5i-3 

41.7 

40.7 

May 

41.0 

40.0 

42.6 

41.0 

June 

48.1 

45-4 

43-6 

42.3 

July 

45-5 

40.0 

44.2 

42.8 

Aug. 

48.7 

44.1 

44.1 

43-° 

Sept. 

54-0 

Si-3 

44-9 

43-9 

Oct. 

57-1 

52.6 

44-8 

43-7 

Nov. 

59-5 

58.0 

44.9 

43-6 

Dec. 

58.8 

57-i 

43-8 

43-3 

Year 

59-5 

40.0 

44-9 

39-5 

1899 

Jan. 

61.6 

59-9 

43-8 

43-2 

Feb. 

61.0 

60.2 

43-6 

43-4 

Mar. 

60.6 

59-9 

43-7 

43-4 

Apr. 

61.0 

60.0 

45-8 

43-4 

May 

61.0 

60.2 

45-8 

44-4 

June 

60.6 

60.  i 

44.4 

43-9 

July 

60.5 

59-9 

44.0 

43-8 

Aug. 

59-9 

59-5 

44.1 

43-o 

Sept. 

60.0 

59-° 

43-4 

42.7 

Oct. 

59-9 

58.9 

42.7 

42.2 

Nov. 

59-9 

59-5 

43-3 

42-3 

Dec. 

60.0 

59-5 

43-3 

42.7 

Year 

61.6 

58.9 

45-8 

42.2 

1900 

Jan. 

60.0 

59-5 

43-9 

42.8 

Feb. 

59-7 

59-5 

44.0 

43-3 

Mar. 

59-5 

59-i 

43-7 

43-5 

Apr. 

59-9 

59-5 

43-6 

43-3 

May 

59-9 

59-3 

43-8 

43-6 

June 

60.0 

59-6 

45-3 

43-7 

APPENDIX   C 
PORTO  RICAN  CURRENCY  REFORM.     BIBLIOGRAPHY 

British  Diplomatic  and  Consular  Reports,  Porto  Rico,  1898-1901. 
London:  Eyre  &  Spottiswoode.  British  Blue  Books. 

CARROLL,  H.  K.  Report  on  the  Island  of  Porto  Rico,  its  Popula- 
tion, Civil  Government,  etc.  Washington:  Superintendent  of 
Documents,  1899. 

.  What  Has  Been  Done  for  Porto  Rico  under  Military  Rule? 

Review  of  Reviews,  XX,  1899,  pp.  705-709. 

CASTELLANO,  TOMAS,  Ministro  de  Ultramar.  Canje  de  la  Moneda 
en  Puerto  Rico.  Discursos  Pronunciados  por  el  Ministro  de  Ul- 
tramar en  las  Sessiones  de  los  Dias  6  y  8  de  Agosto  de  1896  y  en 
la  del  Senado  del  n  del  mismo  mes  y  ano.  Madrid:  Imprenta, 
Fundicion  y  Fabrica  de  Tintas  de  los  Hijos  de  J.  A.  Garcia,  1896. 

COLL  Y  TOSTE,  CAYETANO,  JR.  A  Review  of  the  Social,  Economic, 
and  Industrial  Conditions  of  the  Islands  of  Puerto  Rico  Im- 
mediately Preceding  Occupation  by  the  United  States.  Ap- 
pendix I  of  Report  of  Brigadier  General  George  W.  Davis  on  Civil 
Affairs  of  Puerto  Rico,  1899.  House  Documents,  $6th  Congress, 
ist  Session,  VII,  No.  2,  Reports  of  War  Department. 

CONANT,  CHARLES  A.  A  Special  Report  on  Coinage  and  Banking  in 
the  Philippines  Made  to  the  Secretary  of  War.  Washington: 
Superintendent  of  Documents,  1901. 

CORWINE,  WILLIAM  R.  Report  on  Porto  Rico  to  the  Merchants' 
Association  of  New  York,  June  5,  1899. 

DAVIS,  GEORGE  W.  Report  of  Brigadier  General  George  W.  Davis 
on  Civil  Affairs  of  Puerto  Rico,  1899.  House  Documents,  s6th 
Congress,  ist  Session,  VII,  No.  2.  Reports  of  War  Department, 

PP-  505-509. 
DINWIDDIE,  W.    The  Money  of   Puerto  Rico.    Harper's  Weekly, 

XLII,  1898,  p.  1286. 
Director  of  the  Mint.     Annual  Reports,  1899-1902.    Washington: 

Superintendent  of  Documents. 

239 


240     THE   PORTO  RICAN  CURRENCY  REFORM  OF   1899-1900 

El  Impartial,  Mayagiiez,  Porto  Rico.     Daily  Newspaper. 

Governor  of  Porto  Rico.  Annual  Reports,  1901  and  1902.  San 
Juan,  Porto  Rico. 

GRIFFIN,  A.  P.  C.,  Compiler.  Bibliography  on  Porto  Rico.  Senate 
Documents,  56th  Congress,  26.  Session,  Document  No.  222. 

Hearings  before  the  Committee  on  Pacific  Islands  and  Puerto  Rico  of 
the  United  States  Senate  on  Senate  Bill  No.  2264,  to  Provide  a 
Government  for  the  Island  of  Puerto  Rico  and  for  Other  Purposes. 
Senate  Miscellaneous  Documents,  56th  Congress,  ist  Session, 
IX,  No.  147. 

HENRY,  GENERAL  GUY,  Military  Governor  of  Porto  Rico.  Remarks 
on  "The  Financial  Administration  of  Colonial  Dependencies," 
with  particular  reference  to  Porto  Rico.  Journal  of  Social 
Science,  December  1899,  pp.  158-163. 

HITCHCOCK,  F.  H.  Trade  of  Puerto  Rico.  Bulletin  No.  13,  United 
States  Department  of  Agriculture,  Section  on  Foreign  Markets. 
Washington:  Superintendent  of  Documents,  1896. 

HOLLANDER,  JACOB  H.  Annual  Report  of  the  Treasurer  of  Porto 
Rico,  1901.  San  Juan,  Porto  Rico. 

La  Correspondencia,  San  Juan,  Porto  Rico.     Daily  Newspaper. 

La  Democracia,  Ponce,  Porto  Rico.    Daily  Newspaper. 

LANDRON,  RAFAEL  LOPEZ.  Cartas  Abiertas  para  el  Pueblo  de  Puerto 
Rico.  Mayagiiez,  Porto  Rico:  Imprenta  Union  Obrera,  1911. 

PATON,  FEDERICO  G.  La  Fabricacion  de  las  Monedas.  Madrid:  J. 
Benito  y  Cerezo,  1903. 

PORTER,  ROBERT  P.,  Special  Commissioner  for  the  United  States 
to  Cuba  and  Porto  Rico.  Report  on  the  Currency  Question 
of  Porto  Rico.  Washington:  Superintendent  of  Documents, 
1899. 

ROWE,  LEO  S.  The  United  States  and  Porto  Rico.  New  York: 
Longmans,  Green,  &  Co.,  1904. 

Secretary  of  the  Treasury.  Annual  Reports,  1898-1902.  Washing- 
ton: Superintendent  of  Documents. 

UBEDA  y  DELGADO,  MANUEL.  Isla  de  Puerto  Rico,  Estudio,  Historico, 
Geographico  y  Estadistico  de  la  Mesura.  Puerto  Rico :  Establa- 
cimiento  tip.  del  Boletin,  1878. 

United  States  Insular  Commission.  Report  to  the  Secretary  of 
War  upon  Investigations  Made  into  the  Civil  Affairs  of  the  Island 
of  Porto  Rico,  with  Recommendations.  War  Department,  Di- 
vision of  Customs  and  Insular  Affairs,  June  9, 1:899.  Washington: 
Superintendent  of  Documents,  1899. 

VAN  MIDDELDYK,  R.  A.  The  History  of  Puerto  Rico.  New  York: 
D.  Appleton  &  Co.,  1903. 


APPENDIX  C  241 

WHELPLEY,  J.  D.    The  Currency  of  Porto  Rico.    Forum,  XXVII, 

1899,  pp.  564-569- 
WIENER,   C.     Financial  Wrong  in  Porto  Rico.    North  American 

Review,  CLXVII,  1898,  pp.  754-755- 
WILLOUGHBY,  W.  F.    Territories  and  Dependencies  of  the  United 

States.    New  York:  The  Century  Company,  1905. 


PART   III 
THE   PHILIPPINE   CURRENCY  REFORM 


CHAPTER  I 

MONETARY  CONDITIONS  PRIOR  TO  THE  AMERICAN 
OCCUPATION 

THE  monetary  experiences  of  the  Philippine  Islands  have 
been  scarcely  less  varied  than  those  of  the  United  States. 
Among  the  articles  used  as  money  which  one  finds  referred 
to  in  the  early  records  may  be  mentioned  rice,  coarse  cloth,1 
metal  bells  brought  from  China,2  silver  wire  rolled  up  like 
a  wax  taper  from  which  pieces  were  cut  equal  in  value  to 
the  price  of  the  article  being  purchased,3  gold  and  silver  by 
weight,4  and  silver  in  pieces  marked  by  weight. 5  Along  with 
the  wide  use  of  barter  and  the  extensive  use  of  articles  of 
universal  demand  as  money  —  practices  which  are  found 
even  to-day  in  the  remoter  regions  of  the  Philippines  — 
we  find  evidence  of  both  silver  coin  6  and  gold  coin  7  circu- 
lating in  the  Islands  as  early  as  the  last  quarter  of  the 
sixteenth  century.  In  1627  we  find  that  salaries  of  Spanish 
officials  were  expressed  in  pesos  of  gold.8 

For  the  next  two  hundred  and  fifty  years  there  appears 
to  have  been  no  time  when  silver  and  gold  did  not  circulate 
in  the  Islands.  The  coins  came  from  Spain,  Mexico,  South 
America,  China,  and  India.  During  the  early  part  of 

1  Blair  and  Robertson,  The  Philippine  Islands,  1493-1898,  LI,  pp.  84-85, 
note. 

2  Ibid.,  XVI,  p.  128. 
«Ibid.,  XIX,  p.  316. 
<  Ibid.,  XIII,  p.  56. 

6  Ibid.,  XVIII,  pp.  340-41,  and  XXXIV,  p.  381. 

6  Ibid.,  VI,  p.  28,  and  XIV,  p.  19,  and  VII,  pp.  154  and  202. 

7  Ibid.,  VII,  p.  14. 

8  Ibid.,  XXII,  pp.  228-29,  and  234. 

245 


246  THE  PHILIPPINE  CURRENCY  REFORM 

the  nineteenth  century  it  was  customary  to  stamp  them 
for  circulation  in  the  Philippines.  A  decree  authorizing 
the  circulation  of  gold  and  silver  coins  from  Mexico,  Cen- 
tral America,  and  certain  South  American  countries,  with- 
out the  necessity  of  their  being  restamped,  was  issued  in 
I837-1  Twenty  years  later  a  royal  decree  authorized  for 
Manila  the  first  and  only  mint  ever  established  in  the 
Philippines.2  It  began  operations  in  1861,  coining  only 
gold  coins  of  the  denominations  of  4  pesos,  2  pesos,  and 
i  peso  respectively.  These  gold  coins,  which  were  all 
.875  fine,  contained  22.84  grains  Troy  of  pure  gold  to 
the  peso  and  were  therefore  equivalent  to  about  98.4 
cents  of  United  States  money.  A  decree  of  March  5, 
1862  3  authorized  the  mint  to  recoin  the  silver  circulating 
in  the  Philippines  into  coins  of  50,  20,  and  10  centavos. 
The  5o-centavo  piece  became  a  very  popular  coin  and 
was  made  unlimited  legal  tender.  These  new  silver  coins 
were  .900  fine  and  contained  360.55  grains  Troy  of  pure 
silver  to  the  peso,  giving  a  mint  ratio  with  gold  of  15.77  to  i.4 
With  the  numerous  currency  decrees  and  ordinances  of 
the  fifteen  years  1862-1877  we  need  not  concern  ourselves 
in  this  attempt  to  get  a  background  for  the  discussion  of 
the  currency  reform  undertaken  by  the  American  Govern- 
ment a  generation  later.  It  is  sufficient  to  note  that  in 
the  Philippines,  as  in  Europe,  the  decline  in  the  value  of 
gold  resulting  from  the  Californian  and  Australian  output 
was  for  a  time  favorable  to  the  circulation  of  gold  and  tended 
to  drive  out  of  circulation  the  heavier  silver  coins  which 
at  the  mint  ratio  were  undervalued.  Gold  appears  to  have 
been  abundant  in  the  Philippines  until  about  1875,  when 

1  Aguilar  y  Biosca,  Legislaci6n  sobre  Moneda  Filipina,  p.  20. 

2  Ibid.,  p.  36. 

3  Ibid.,  p.  58. 

4  Estimates  place  the  total  coinage  of  gold  and  silver  at  the  Manila  mint 
down  to  1876  at :  gold,  probably  more  than  20  million  pesos ;  and  silver,  about 
one  million  pesos.    Report  of  the  Schurman  Philippine  Commission,  I, 
pp.  I44-4S- 


EARLY  MONETARY  CONDITIONS  247 

the  advance  in  the  market  ratio  between  gold  and  silver 
throughout  the  world  began  to  make  itself  felt  in  the  Philip- 
pines, reversing  the  previous  course  by  driving  out  of  cir- 
culation the  gold,  which  at  the  mint  ratio  was  now  under- 
valued, and  by  drawing  in  from  abroad  the  overvalued 
silver,  especially  Mexican  pesos.1  By  1884  gold  coin  had 
entirely  disappeared  from  circulation.2 

In  a  communication  of  March  20,  1877  to  the  Governor- 
General,  the  Director  of  the  Public  Treasury  called  attention 
to  the  fact  that  the  Mexican  silver  money,  which  from  very 
early  times  had  circulated  freely  in  the  country  and  for  some 
time  had  supplied  the  needs  resulting  from  the  scarcity  of 
national  money,  had  now  considerably  declined  in  its  "in- 
trinsic value,"  and  was  rejected  by  many  individuals  and 
by  nearly  the  entire  commercial  community3  of  Manila. 
" Under  the  circumstances/'  he  declared,  "if  the  Treasury 
should  indefinitely  continue  to  accept  legally  and  disburse 
this  money,  it  would  cause  injustice  to  its  debtors  and  evi- 
dent loss  to  its  creditors;  it  would  furthermore  cause  a  dis- 
turbance in  the  exchanges  which  might  convert  itself  into 
a  veritable  monetary  crisis."  Pursuant  to  the  Director's 
recommendations,  the  Governor- General  on  the  same  day 
issued  a  decree  4  prohibiting  the  importation  of  all  kinds  of 
foreign  money,  authorizing  for  the  time  being  the  con- 
tinuation of  the  circulation  of  the  Mexican  silver  coin  then 
in  the  Islands,  but  directing  its  recoinage  into  Spanish 
coin  at  the  mint  of  Manila  as  soon  as  possible.  In  this 
way  it  was  expected  to  control  the  supply  of  money. 

From  this  time  until  after  the  American  occupation  the 
importation  of  Mexican  and  other  foreign  money  was 

1  Report  of  Schurman  Philippine  Commission,  I,  pp.  146-47. 

2  In  1880  the  British  consul  at  Manila  reported  to  his  Government  that 
"the  gold  coinage  has  now  all  but  disappeared,  having  been  replaced  by 
Mexican  and  Spanish  silver  dollars,  which  still  continue  to  be  imported  on  a 
pretty  large  scale." 

3  Aguilar  y  Biosca,  pp.  85-86. 

4  Ibid.,  p.  87. 


248  THE  PHILIPPINE  CURRENCY  REFORM 

prohibited,  although  there  was  a  considerable  illicit  impor- 
tation of  Mexican  pesos  with  the  connivance,  in  part  at 
least,  of  Spanish  officials.1  Down  to  the  year  1905  Mexican 
pesos  constituted  a  large  part  of  the  country's  money  sup- 
ply —  at  the  time  of  the  American  occupation  probably 
something  over  half. 

With  the  objects  of  preventing  the  exportation  of  Span- 
ish-Filipino silver  coin,  and  of  bringing  the  money  of  the 
Philippines  into  closer  harmony  with  that  of  the  mother 
country,  a  decree  was  issued  March  23,  1877,*  providing 
that  the  silver  which  should  be  coined  at  the  Manila  mint 
should  have  a  fineness  of  .835  (that  is,  the  fineness  of 
Spanish  coin)  instead  of  .900,  as  was  the  case  before.3 
This  action  was  ineffective  for  some  time  because  it  did  not 

1  "When  the  country  required  currency  to  move  off  and  balance  the 
heavy  exports  of  a  good  season,  the  only  means  of  getting  the  needed 
money  was  by  raising  the  value  of  the  dollar  [i.e.  the  peso]  to  a  price  that 
would  enable  the  smugglers  to  bring  in  coin  from  China  at  a  substantial  profit 
to  themselves.  It  was  not  uncommon  for  the  dollar  to  go  to  a  premium  of 
10  or  12  per  cent,  and  this  would  immediately  start  the  flow  of  silver  toward 
the  Islands,  which  would  be  continued  until  the  demand  was  met  and  the 
rate  of  exchange  was  reduced  to  a  point  which  caused  smuggling  to  cease 
being  profitable. 

"The  smuggling  of  silver  into  the  Islands  was  a  recognized  industry.  It 
was  carried  on  largely  by  the  rich  'mestizos,'  or  Chinese  half-castes.  There 
was  a  regular  system  for  the  bringing  in  of  these  coins,  which  would  be 
shipped  from  Hong  feong  in  a  special  steamer  and  the  cargo  landed  at  some 
point  north  or  south  of  Manila  Bay.  .  .  .  There  was  nothing  disgraceful  in 
the  view  of  the  people  in  Manila  in  these  practices,  and  those  who  were  in- 
terested in  the  illicit  trade  will  discuss  their  operations,  telling  the  manner  in 
which  coins  were  brought  in.  In  a  convent  north  of  Manila  there  were 
regularly  equipped  vaults  in  the  basement  of  the  building,  where  much  of  the 
silver  was  first  taken.  The  customs  officers  were  said  to  be  aware  of  the 
manner  of  bringing  in  coin,  and  in  the  charges  computed  for  the  import  of 
contraband  silver  was  also  included  a  'squeeze'  for  the  officials."  Edward 
W.  Harden,  Special  Commissioner  of  the  United  States,  Report  to  the 
Secretary  of  the  Treasury  on  the  Financial  and  Industrial  Conditions  of  the 
Philippine  Islands,  1898,  p.  6. 

2  Aguilar  y  Biosca,  pp.  88  and  89. 

3  This  reduction  to  .835  fine  gave  these  coins  a  gross  weight  in  Troy 
grains  of  400.56  to  the  peso,  and  a  pure  silver  content  of  334-69  grains  to  the 
peso. 


EARLY  MONETARY  CONDITIONS  249 

meet  the  approval  of  the  Government  at  Madrid;  but 
finally  on  November  23,  1880  an  order  was  issued  putting 
it  into  effect.  During  the  next  few  years  the  mint  was  kept 
busy  recoining  Spanish  coins,  Spanish-Filipino  coins,  and 
foreign  coins  into  pieces  of  50,  20,  and  10  centavos. 

In  1897  the  Spanish  Government  sent  to  the  Philippines 
six  million  peso  pieces  known  as  Alfonsinos,  coined  under 
the  same  law  which  governed  the  five-peseta  piece  of 
Spain.1  The  Alfonsino  contained  25  grams  (385.8  grains) 
of  silver  .900  fine,  giving  it  a  pure  silver  content  of  347.175 
grains;  whereas  formerly  the  pure  silver  content  of  the 
coins  had  been  360.55  grains. 

Kinds  of  Currency  at  Time  of  American  Occupation 

The  kinds  of  currency  in  the  Philippines  at  the  time  of 
the  American  occupation  therefore  may  be  described 
briefly  as  follows: 

(1)  An  unknown  quantity  of  Mexican  pesos,  many  of 
which  had  been  illicitly  smuggled  into  the  country.     These 
pesos  were  of  widely  different  dates  of  coinage  and  of 
different  weights.     Most   of   them,    however,  were   com- 
paratively recent  and  contained  417.7  grains  of  silver  .9028 
fine,  or  377  grains  of  pure  silver  when  of  full  weight.     Their 
pure  silver  content  was  therefore  about  1.5  per  cent  greater 
than  that  of  the  United  States  silver  dollar,  and  their 
gross  weight  about  1.3  per  cent  greater.     Many  of  them 
were  badly  worn. 

(2)  Five  and  a  half  millions  of  Alfonsino  pesos,  commonly 
known  as  Alfonsinos,  having  a  pure  silver  content  of  347.175 
grains  or  7.9  per  cent  less  than  that  of  the  Mexican  peso. 

(3)  An  unknown  quantity  of  silver  coins  of  denominations 
of  50,  20,  and  10  centavos  coined  in  the  Philippines,  and 
containing  when  of  full  weight  334.69  grains  of  pure  silver 

1  The  royal  decree  providing  for  this  coin  is  given  in  full  in  La  Politica 
de  Espana  en  Filipinas,  March  15,  1897,  VII,  p.  217. 


250  THE  PHILIPPINE   CURRENCY  REFORM 

to  the  peso  or  11.2  per  cent  less  than  the  pure  silver  con- 
tent of  the  Mexican  peso. 

(4)  A  miscellaneous  assortment,  unknown  in  quantity, 
consisting  of  Spanish  pesos,  some  of  them  dating  as  far 
back  as  the  eighteenth  century;   Spanish  fractional  silver 
coins;    silver  coins  from  Spanish  America  (in  addition  to 
those  from  Mexico  above  mentioned);    copper  coins  of 
Spain  1  and  of  numerous  other  countries,  including  many 
from  British  North  Borneo;    and  a  considerable  number 
of  crudely  made  coppers  known  as  Igorot  coppers,  which 
had  been  hammered    out    by    the  natives   from   copper 
obtained   from   the   surface   copper  deposits  which   crop 
out  in  the  northern  Luzon  provinces  of  Lepanto,  Bontoc, 
and  Nueva  Vizcaya. 

(5)  About  3,400,000  pesos  of  asset  currency  bank  notes 
issued  by  the   Spanish-Filipino  Bank  of  Manila,   under 
the  authority  granted  by  a  Spanish  decree  of  1896.     This 
decree  had  continued  to  the  Bank  its  monopoly  of  the'  note 
issue  privilege,  and  had  authorized  it  to  issue  notes  to  the 
amount  of  three  times  its  capital  stock  of  1,500,000  pesos. 

All  of  these  different  kinds  of  money  normally  circulated 
at  a  par  with  each  other,  and  at  a  value,  expressed  in 
gold  through  exchange  rates  on  gold-standard  countries, 
well  above  the  bullion  value  of  the  Mexican  peso  or  its 
market  price  as  coin  in  London.  The  explanation  is  that 
the  supply  of  money  was  so  limited  that  all  kinds  circulated 
at  a  "  scar  city  value"  substantially  above  the  bullion  value 
of  the  dearest,  i.e.,  of  the  Mexican  peso.  The  fluctuations 
by  months  in  the  gold  value  of  the  peso  for  the  period 
January  1893  to  September  1904  are  shown  graphically  on 
the  following  chart.  Exchange  rates  are  quoted  in  terms 
of  the  number  of  English  pence  to  the  peso.2 

1  Just  prior  to  the  American  occupation  the  Spanish  Government  brought 
from  Spain  a  half  million  Spanish  5-centavo  pieces  supposedly  equivalent 
to  i/ioo  of  a  peso  in  the  Philippines.  They  were  worth,  however,  much 
more  for  circulation  in  Spain  and  were  promptly  sent  back. 

a  The  figures  for  sterling  exchange  rates  upon  which  the  chart  is  based 


EARLY  MONETARY  CONDITIONS 


251 


In  the  interpretation  of  the  chart  allowance  must  be  made 
for  two  facts :  first,  that  the  exchange  rates  cited  for  the 
period  under  review  were  for  four  months  sight  bank  paper 
and  therefore  presumably  higher  than  cable  rates  would 
have  been  by  an  amount  approximately  equal  to  interest 


*     ^ONTHLY  VARIATIONS  IN  EXCHANGE  AND 


r 


for  five  months  at  the  London  market  rate;  second,  that 
quoted  prices  of  silver  used  in  computing  bullion  value 
are  those  for  prompt  delivery  in  the  London  market,  while 
shipment  from  London  to  Manila  normally  involved  ship- 
ping expenses  of  about  one  per  cent  and  interest  for  about 
40  days.  After  due  allowance  is  made  for  these  facts,  it 
will  be  seen  that  the  Philippine  coins  circulated  for  a  con- 
siderable part  of  the  time  prior  to  1897  at  a  value  sub- 
stantially higher  than  that  of  the  bullion  they  contained 
in  the  markets  of  the  world.1 

were  compiled  by  the  writer  from  the  daily  records  of  the  Manila  branch 
of  the  Hongkong  and  Shanghai  Banking  Corporation  through  the  courtesy 
of  its  manager,  H.  D.  C.  Jones.  These  figures,  together  with  those  for  the 
bullion  value  of  the  peso  and  for  sterling  exchange  rates  in  Hongkong,  are 
given  in  detail  by  months  in  the  writer's  Second  Annual  Report  as  Chief 
of  the  Division  of  the  Currency  for  the  Philippine  Islands,  pp.  23-26. 

1  For  1894  the  average  exchange  rate  was  so.iod.,  and  the  average  bullion 
value  of  the  Mexican  peso  in  London  was  24.59^.,  —  a  difference  of  22.7  per 


252  THE  PHILIPPINE  CURRENCY  REFORM 

The  explanation  is  in  limitation  of  quantity.  Strictly 
speaking,  the  Philippines  were  not  upon  the  silver  standard 
from  the  time  that  gold  disappeared  from  circulation  in 
the  early  eighties  to  the  time  of  the  American  occupation 
in  1898.  They  were  upon  a  fiduciary  coin  standard,  there 
being  no  free  coinage,  no  free  movement  of  money  into 
and  out  of  the  country,  and  therefore  no  ready  increase  and 
decrease  in  the  money  supply  in  response  to  the  declines 
and  advances  in  the  gold  price  of  silver.  Here  is  an  excel- 
lent illustration  of  the  oft-disputed  principle  of  monopoly 
or  scarcity  value  as  applied  to  currency.  During  this 
period  none  of  the  Philippine  currency  was  redeemable  in 
gold1  and  there  was  little  prospect  of  such  redemption; 

cent.  If  we  reduce  the  former  by  0.55  per  cent,  representing  five  months' 
interest  at  the  average  London  market  rate  (1.3  per  cent)  for  six  months' 
bills,  and  if  we  raise  the' figure  for  the  bullion  value  of  the  peso  by  1.14  per 
cent,  representing  one  per  cent  for  transportation  charges,  and  interest  for 
40  days  in  transit  at  the  prevailing  rate  of  1.3  per  cent  per  annum,  we  have 
for  the  money  value  and  the  bullion  value  of  the  peso,  respectively,  30.02^. 
and  24.87^.  This  represents  an  average  money  value  above  the  average 
bullion  value  for  the  year  1894  of  20.7.  The  corresponding  figure  for  1896 
would  be  9.3  per  cent.  Very  substantial  differences  between  money  value 
and  bullion  value  are  found  for  the  years  1890,  1892,  and  1893. 

To  the  same  effect  is  the  evidence  based  upon  the  near-by  silver  exchanges, 
as  will  be  seen  by  a  comparison  of  the  sterling  exchange  rates  in  Manila, 
and  in  Hongkong  for  the  same  period,  given  in  the  Report  cited  in  the  pre- 
ceding footnote. 

The  following  extract  is  quoted  from  a  report  of  the  British  Vice  Consul 
in  Manila:  "...  During  the  export  season,  when  money  was  scarce, 
Manila  rates  would  rule  as  high  as  10  or  15  per  cent  over  those  in  Hong- 
kong and  China,  whence  the  dollars  were  smuggled,  .  .  .  while  in  the  au- 
tumn exchange  would  fall  to  par  in  those  places,  there  being  frequently  an 
export  of  Mexicans  at  this  season  to  be  again  replaced  by  smuggled  coins 
when  required."  Quoted  in  U.  S.  Bur.  Statistics,  Monthly  Summary,  Nov. 
1899,  p.  1323. 

1  An  attempt  was  made  during  the  seventies  and  eighties  to  put  the 
Archipelago  on  the  gold  standard,  but  nothing  came  of  it.  Cf.  James 
A.  LeRoy,  The  Americans  in  the  Philippines,  I,  p.  46. 

In  November  1894  the  Manila  Chamber  of  Commerce  passed  a  petition 
favoring  the  establishment  in  the  Philippines  of  a  gold  standard.  The  peti- 
tion and  the  contemporaneous  discussions  did  not  show  a  very  high  order  of 
intelligence  on  the  subject  of  currency.  Cf.  La  Politica  de  Espana  en  Fili- 
pinas,  V,  No.  105,  pp.  37-42. 


EARLY  MONETARY  CONDITIONS  253 

and  yet  Mexican  pesos  containing  377  grains  of  pure  silver, 
Alfonsinos  containing  7.9  per  cent  less,  and  Spanish-Filipino 
coins  of  lower  denominations  containing  11.2  per  cent  less 
pure  silver  to  the  peso,  all  circulated  at  the  same  value, 
and  that  a  value  running  at  times  over  20  per  cent  above 
the  bullion  value  of  the  Mexican  peso.  The  cheaper  coins 
could  not  drive  out  the  dearer  because  there  were  not  enough 
of  them;  or,  stated  differently,  the  Mexican  pesos,  because 
of  the  monetary  demand  and  of  the  limitations  on  the  quan- 
tity of  the  circulating  media,  were  worth  more  in  the  Philip- 
pines than  they  were  outside. 


CHAPTER  II 

THE  CURRENCY  PROBLEM  OF  THE  MILITARY  GOVERNMENT 

ALTHOUGH  the  Spanish  fleet  in  Manila  Bay  was  'de- 
stroyed by  Admiral  Dewey  May  i,  1898,  not  until  August 
13  did  the  American  troops  —  approximately  n,ooo  in 
number  under  General  Wesley  E.  Merritt  —  land  and 
take  active  possession  of  Manila.  About  a  week  later 
nearly  5000  more  American  soldiers  arrived.  On  August 
26  the  command  of  the  American  forces  in  the  Philip- 
pines was  transferred  from  General  Merritt  to  Major 
General  E.  S.  Otis,  who  held  the  position  of  Military  Gov- 
ernor of  the  Philippines  until  succeeded  by  Major  General 
MacArthur  in  May  1900.  By  the  time  of  the  outbreak  of 
the  Filipino  insurrection  early  in  February  1899  the  num- 
ber of  American  troops  had  increased  to  nearly  21,000. 
Although  troops  of  the  volunteer  army  began  to  return 
home  as  early  as  June  1899,  the  insurrection  required  the 
bringing  out  of  more  troops,  both  regular  and  volunteer, 
and  by  November  1900  the  American  military  force  in  the 
Philippines  amounted  to  about  70,000.  The  field  of  oc- 
cupation for  some  time  was  limited  to  the  city  of  Manila 
and  certain  of  its  immediate  environs,  but  after  the  out- 
break of  the  insurrection  it  was  gradually  extended  to  other 
cities  and  sections.  The  important  commercial  cities  of 
Iloilo  and  Cebu  were  occupied  in  February  1899,  and 
the  Island  of  Negros  was  occupied  two  months  later. 
According  to  our  best  authority  on  recent  Philippine  his- 
tory, the  late  James  A.  LeRoy,  the  occupation  of  all  the 
civilized  provinces  of  northern  Luzon  was  completed  about 

254 


CURRENCY  PROBLEM  OF  MILITARY  GOVERNMENT      255 

December  i,  1899,  and  by  June  1901  the  occupation  by 
the  American  army  was  virtually  extended  to  "all  the 
old  seats  of  Spanish  authority,  with  the  exception  only  of 
a  few  outposts  on  the  border  of  or  within  the  territory  of 
the  unchristianized  inhabitants;  and,  indeed,  American 
troops  occupied,  outside  of  the  provincial  capitals,  in- 
numerable towns  which  had  never  seen  a  command  of 
Spanish  soldiers,  but  only  native  constabulary  under 
Spanish  officers/' 1 

Financial  provision  for  this  large  American  army  re- 
quired the  local  expenditure  of  much  money  both  for  wages 
and  for  supplies,  while  the  administration  of  civil  affairs 
by  the  military  authorities  called  for  additional  large  ex- 
penditures, and  involved  the  taking  over  by  the  Military 
Government  of  the  Spanish  revenue  system  and  its  gradual 
adaptation  to  the  new  conditions.  This  promptly  brought 
the  military  authorities  face  to  face  with  a  new  problem, 
for  the  handling  of  which  they  had  had  neither  training  nor 
experience.  It  was  the  problem  of  adjusting  their  fiscal 
arrangements  to  a  currency  system  based  upon  a  fiduciary 
silver  coin  standard. 

The  problem  was  by  no  means  an  easy  one,  and  in  its 
solution  the  Military  Government  had  the  advantage  of 
practically  no  expert  assistance.  An  article  in  the  Manila 
Times,  which  figured  in  official  correspondence  2  during  the 
summer  of  1899,  well  expressed  the  feeling  of  many  fiscal 
officers  of  the  army.  It  began  as  follows: 

"For  perversities,  complexities,  difficulties,  and  im- 
possibilities, Manila  is  one  of  the  most  wonderful  places 
on  the  face  of  the  earth,  and  it  would  seem  that  all  the 

1  LeRoy,  The  Americans  in  the  Philippines,  II,  pp.  156  and  195. 

2  Edwards,  Currency  and  Exchange  in  the  Philippines,  pp.  15-16  (House 
Docs.,  s6th  Congress,  26.  Sess.,  1900-01,  LXXIV,  Miscell.  Doc.  No.  160). 
Cited  hereafter  as  Edwards.    This  is  a  compilation  of  official  correspondence 
concerning  currency  matters  in  the  Philippines  from  the  time  of  the  American 
occupation  in  1898  to  November  20,  1900,  prepared  by  Clarence  R.  Edwards, 
later  chief  of  the  Bureau  of  Insular  Affairs  in  the  War  Department. 


256  THE  PHILIPPINE  CURRENCY  REFORM 

natural  cussedness  of  the  climate  and  all  the  artificial  ec- 
centricities of  the  place  and  people  are  concentrated  in  the 
currency.  It  was  bad  enough  in  the  old  days,  and  it  seemed 
as  if  it  could  not  be  worse,  but  now,  for  our  sins,  we  are  given 
practical  proof  that  it  could  be  worse,  for  it  is.  .  .  ." 

The  problem  was  not  one  of  finding  a  satisfactory  cur- 
rency system  for  the  permanent  use  of  the  Islands,  for  in 
the  early  days  of  the  American  occupation  it  was  commonly 
believed  that  the  United  States  would  not  permanently 
hold  the  Philippines,  and  the  Treaty  of  Paris  was  not 
proclaimed  until  April  n,  1899  ;  nor  was  it  the  problem  of 
providing  even  temporarily  a  satisfactory  system  for  the 
7,000,000  people  scattered  throughout  the  Archipelago. 
Most  of  the  native  and  Chinese  population  knew  little  or 
nothing  about  currency  matters,  and  they  were  very  well 
satisfied  with  the  existing  system,  except  as  regards  the  in- 
adequacy of  the  supply  of  small  change.  The  immediate 
problem  was  merely  that  of  providing  a  temporary  modus 
operandi  as  regards  currency  for  the  fiscal  affairs  of  the 
Military  Government.  Later  of  course  the  problem  as- 
sumed a  different  character. 

Broadly  speaking,  one  may  distinguish  three  possible 
plans,  each  of  which  had  its  advocates,  although  it  cannot 
be  said  that  there  was  any  division  of  intelligent  public 
opinion  into  three  definite  camps.  Opinions  were  too  con- 
fused for  that.  The  three  plans  were  as  follows : 

Exclusive  Use  of  United  States  Currency  for  Fiscal 
Operations  of  Government 

One  plan  was  for  the  Government  to  go  over  quickly 
in  all  its  fiscal  arrangements  to  the  exclusive  use  of 
United  States  currency.  Shortly  after  the  occupation 
of  Manila,  large  supplies  of  United  States  currency 
had  been  brought  to  the  Philippines  for  the  purposes 
of  paying  the  army  and  navy  and  the  purchase  of  local 


CURRENCY  PROBLEM  OF  MILITARY  GOVERNMENT      257 

supplies.  This  money  —  the  paper  and  silver  but  not  the 
gold  —  was  slowly  working  its  way  into  circulation.1  The 
law  fixed  the  pay  of  American  soldiers  in  United  States 
currency,  the  funds  with  which  to  pay  the  soldiers  neces- 
sarily came  from  the  United  States,  and  represented  by  far 
the  largest  single  item  of  expenditure  of  the  Military  Gov- 
ernment. A  substantial  part  of  the  wages  of  the  soldiers, 
moreover,  needed  to  be  transmitted  home  on  a  United 
States  currency  basis.2  Americans  were  familiar  with 
United  States  currency  and  did  not  understand  "  the 
unstable  and  fluctuating  Filipino  currency."  All  fluctu- 
ations in  the  gold  value  of  the  local  silver  currency  were 
attributed  to  silver.  During  the  writer's  'two  and  a  half 
years  in  the  Philippines  he  never  heard  the  faintest  sug- 
gestion that  some  of  these  fluctuations  might  possibly  be 
due  to  variations  in  the  value  of  gold.  As  a  matter  of  fact, 
in  the  world's  markets,  silver,  measured  in  purchasing 
power  over  commodities,  was  more  stable  in  value  than 
gold  during  the  years  1898  to  1901  inclusive.3  Further- 
more, a  large  proportion  of  the  Americans  in  the  Philip- 

1  The  Chief  Paymaster  of  the  Philippines  reported  that  for  the  fiscal  year 
ending  June  30,  1899  there  had  been  shipped  to  him  from  San  Francisco : 
gold  coin,  $5,030,500;  paper  currency,  $500,000;    and  silver,  nickel,  and 
copper  coin,  $273,800.    House  Doc.,  56th  Congress,  ist  Sess.,  V,  p.  248. 

The  gold  disappeared  from  circulation  very  quickly. 

"  Payments  were  made  almost  exclusively  in  gold  prior  to  January  i,  1900, 
but  since  that  time  the  greater  portion  has  been  in  United  States  paper 
currency."  Annual  Rep.,  Chief  Paymaster,  Division  of  Philippines,  1900. 
House  Doc.,  56th  Congress,  2d  Sess.,  VI,  p.  136. 

2  Of  the  money  disbursed  to  the  troops  in  March  1899  by  the  paymaster's 
department  about  a  third  came  back  to  the  department  either  for  deposit 
or  for  the  purchase  of  drafts  on  the  sub-treasuries  in  the  United  States. 

8  For  these  years  the  variations  in  the  value  of  gold  as  measured  by  the 
reciprocals  of  the  Sauerbeck  index  numbers  of  prices  in  England  and  the 
value  of  silver  as  measured  by  these  index  numbers  converted  to  a  silver 
basis  at  the  average  market  prices  of  silver  were  as  follows :  Value  of  gold : 
1898,  156.2;  1899,  147.0;  1900,  133.3;  I9°I>  142.8.  Value  of  silver: 
1898,  69.0;  1899,  66.0;  1900,  62.0;  1901,  64.0. 

The  world's  production  of  silver  at  this  period  was  much  more  stable  than 
that  of  gold.     Cf.  Ann.  Rep.  Dir.  Mint,  1914,  p.  267. 
s 


258  THE  PHILIPPINE  CURRENCY  REFORM 

pines  could  not  see  any  reason  why  the  American  dollar 
should  not  at  once  follow  the  flag. 

The  great  obstacle  to  the  Government's  depending  upon 
United  States  currency  exclusively  was  the  fact  that 
practically  all  the  business  of  the  Philippines,  the  buying 
and  selling  of  merchandise,  payment  of  wages,  the  loans, 
deposits,  and  foreign  exchange  operations  of  the  banks, 
all  were  on  a  local  currency  basis.  This  local  currency 
was  emphatically  the  money  of  the  country,  and,  regard- 
less of  what  the  Government  should  do  in  the  matter  of  its 
own  fiscal  operations,  must  continue  to  be  so  for  some  time 
to  come.  It  would  have  resulted  in  loss  and  much  hard- 
ship and  have  been  provocative  of  bitter  resentment  on 
the  part  of  the  natives  to  have  compelled  them  to  buy 
United  States  currency  at  the  banks  and  exchange  shops 
with  which  to  pay  taxes  and  other  government  dues,  and 
to  sell  at  these  same  banks  and  exchange  shops  for  local 
currency  the  United  States  currency  they  received  from  the 
Government  in  payment  of  wages  and  for  supplies.  Ex- 
change shops  are  usually  not  popular,  and  in  the  Philippines 
their  unpopularity  was  aggravated  by  the  fact  that  they 
were  owned  largely  by  the  Chinese.  Moreover  the  people 
did  not  think  in  terms  of  United  States  dollars,  but  in  terms 
of  local  pesos,  and  any  attempt  to  force  rapidly  the  United 
States  dollar  into  common  use  would  have  caused  confusion 
and  maladjustments  in  prices,  wages,  and  money  contracts.1 
The  Filipino  like  most  Orientals  has  a  great  respect  for 
custom,  "for  what  has  been";  he  had  none  too  great  con- 
fidence in  the  new  invaders  of  his  country,  and  this  was 
no  time  to  antagonize  him  needlessly.  It  might  have 
been  possible  to  extend  to  the  Islands  the  United  States 
currency  system,  but  it  would  have  been  necessary  to  do  it 
slowly. 

1  For  a  further  discussion  of  this  subject,  see  infra,  pp.  303-304. 


CURRENCY  PROBLEM  OF  MILITARY  GOVERNMENT      259 

Use  Local  Currency  {or  Fiscal  Operations  of  Government 

The  second  plan,  and  the  one  that  probably  would  seem 
the  natural  one  to  most  students  of  monetary  science,  was  to 
recognize  frankly  the  status  quo  as  regards  the  Philippine 
monetary  system  until  such  a  time  as  the  United  States 
should  withdraw  from  the  Islands,  or,  having  decided  to 
remain,  should  undertake  a  permanent  reorganization  of 
the  entire  currency  system.  After  all,  the  number  of 
American  soldiers  in  the  Philippines  represented  a  very 
small  percentage  of  the  entire  population,  and  as  the 
American  control  should  be  extended  to  other  places  than 
Manila  it  would  be  increasingly  difficult  to  make  the 
American  dollar  follow  the  flag. 

The  obstacles,  however,  to  the  exclusive  use  of  local 
currency  by  the  military  authorities  were  very  great.  In 
the  first  place  there  was  the  legal  difficulty  that  army 
salaries  were  by  law  payable  in  United  States  currency. 
Assuming  that  this  difficulty  could  have  been  overcome 
either  by  a  liberal  interpretation  of  the  law  or  by  new 
legislation,  the  question  arose :  Where  would  the  Military 
Government  obtain  the  local  currency  with  which  to  make 
its  immense  payments?  The  Military  Government's 
receipts  from  taxes  and  public  dues  represented  a  very 
small  part  of  its  expenditures.  The  army  had  to  be  paid 
out  of  funds  drawn  from  the  United  States.  There  were 
two  possible  ways  by  which  the  army  could  supply  itself 
with  local  currency.  One  was  to  obtain  it  from  the  Manila 
banks  against  the  sale  of  drafts  on  United  States  Govern- 
ment funds  in  America.  The  other  was  for  the  Military 
Government  in  the  Philippines  (or  the  War  Department 
in  the  United  States)  to  undertake  the  purchase  abroad  of 
Mexican  pesos  and  their  shipment  on  army  transports  to 
the  Philippines. 

To  the  first  plan,  which  the  banks  favored,  there  was 
the  serious  objection  that  the  Government  would  be  placed 


260  THE  PHILIPPINE  CURRENCY  REFORM 

at  the  mercy  of  the  banks  and  might  be  exploited  by  the 
manipulation  of  exchange  rates.  There  were  at  the  time 
three  commerical  banks  of  consequence  in  Manila:  the 
Spanish-Filipino  Bank,  a  local  institution  which  had  been 
closely  affiliated  with  the  Spanish  Government  and  had 
enjoyed  a  monopoly  of  the  note-issue  privilege,  but  which 
had  little  foreign  exchange  business  except  with  Spain; 
the  Manila  branch  of  the  Hongkong  and  Shanghai  Bank- 
ing Corporation,  a  large  English  corporation  with  branches 
scattered  throughout  the  Orient  and  with  branches  also 
in  London  and  New  York,  and  with  its  head  office  in  Hong- 
kong; the  Manila  branch  of  the  Chartered  Bank  of  India, 
Australia,  and  China,  an  English  corporation  similar  to  the 
preceding  one,  with  headquarters  in  London,  and  branches 
scattered  throughout  the  Orient  and  one  in  New  York. 
The  Government's  exchange  operations  would  almost  neces- 
sarily have  been  conducted  through  one  or  both  of  these 
two  large  English  banks.  As  will  be  seen  later,1  the  mili- 
tary authorities  in  the  Philippines  early  came  to  distrust 
these  foreign  banks,  and  believed  that  they  connived  to 
exploit  the  Americans.  Regardless  of  the  adequacy  or 
inadequacy  of  the  reasons  for  this  distrust,  the  distrust 
existed  and  was  an  insuperable  obstacle  to  any  plan  for  de- 
pending largely  upon  the  banks  for  army  funds.  At  best 
it  would  have  been  an  anomalous  action  for  the  United 
States  Military  Government  in  the  Philippines,  at  a  time 
of  war  or  insurrection,  to  have  placed  itself  so  completely 
in  the  hands  of  two  foreign  banks.  How  different  would 
have  been  the  situation  had  the  United  States  had  at  that 
time  a  great  central  bank  like  those  of  the  European  coun- 
tries, or  had  it  had  the  present  federal  reserve  system ! 
Either  could  promptly  have  established  branches  in  the 
Philippines,  and  aided  the  Government  in  its  fiscal  oper- 
ations. 
The  proposal  that  the  military  authorities  themselves 

1  Cf.  appendix  A,  pp.  383-85. 


CURRENCY  PROBLEM  OF  MILITARY  GOVERNMENT      261 

should  undertake  directly  the  importation  of  Mexican 
pesos  was  repeatedly  urged  in  certain  quarters  but  was 
not  received  with  favor  in  Washington.1  It  is  very  doubt- 
ful whether  the  fiscal  officers  of  the  Philippine  Military 
Government,  those  of  the  War  Department  at  Washington, 
or  even  those  of  the  Treasury  Department  were  properly 
qualified  to  go  into  the  highly  sensitive  silver  market,  and 
"play  the  game"  of  purchasing  Mexican  pesos  against  the 
great  oriental  exchange  banks.  Moreover,  unless  the  Govern- 
ment used  this  privilege  merely  as  a  whip  over  the  banks  to 
keep  them  from  exploiting  it,  the  procedure  would  need  to 
be  a  continuing  one,  since  the  fact  that  the  Military  Gov- 
ernment was  compelled  to  secure  its  income  from  outside 
the  Philippines  would  have  led  to  a  continual  importation 
of  Mexican  dollars  by  the  Government,  regardless  of  the 
state  of  the  local  money  market.  This  would  have  had  the 
effect  of  keeping  the  local  currency  circulation  continually 
redundant,  and  the  same  phenomenon  would  doubtless 
have  occurred  that  occurred  in  the  case  of  United  States 
currency,2  i.e.  the  banks  would  have  been  exporting  Mexican 
pesos  commercially  to  relieve  a  redundant  circulation,  at 
the  very  time  that  the  Government  was  causing  redundancy 
by  bringing  in  Mexican  pesos  with  which  to  make  army  dis- 
bursements. 

Another  difficulty  which  would  have  had  to  be  over- 
come had  the  Military  Government  placed  its  fiscal  op- 
erations upon  a  local  currency  basis  was  one  in  connection 
with  the  transfer  of  funds  to  the  United  States  by  soldiers. 
For  expenditures  in  the  Philippines  local  currency  was 
more  widely  accepted  than  United  States  currency,  and, 
except  as  regards  articles  imported  from  gold  standard 
countries,  was  probably  more  stable  in  its  purchasing  power. 
To  the  extent  that  the  soldiers  spent  their  money  in  the 
Islands  local  currency  was  the  preferable  money;  but  this 
was  not  true  as  regards  the  money  that  the  soldiers  saved 

1  Cf.  Edwards,  pp.  10-12,  18,  19,  and  38.  2  Cf.  infra,  pp.  264-65. 


262  THE  PHILIPPINE  CURRENCY  REFORM 

or  sent  to  their  families  in  America.  A  Mexican  peso 
bought  practically  the  same  amount  of  local  supplies  in 
the  Philippines  when  exchange  with  United  States  currency 
stood  at  Pfs.1  2.27  to  $1.00  as  when  it  stood  atPfs.  2.00  to 
$1.00 ;  but  in  the  latter  case  it  could  be  transferred  home  as 
approximately  $0.50,  and  in  the  former  only  as  $0.44.  Had 
the  Government  placed  wages  upon  a  local  currency  basis, 
it  would  almost  certainly  have  been  compelled  to  adopt 
some  such  plan  as  that  followed  by  certain  of  the  large 
European  banks  and  commercial  houses  in  the  Orient, 
which  agreed  to  transfer  to  the  home  land  on  request  a 
certain  part  of  the  wages  of  their  European  employees 
on  a  fixed  exchange  basis  with  gold.2 

1  Executive  order  No.  66  issued  by  the  Civil  Governor  August  3,  1903 
made  the  official  designation  for  local  currency  "  Pfs.,"  that  for  United  States 
currency  "$,"  and  that  for  the  new  United  States  Philippine  currency  which 
had  just  begun  to  be  placed  in  circulation  "  P."     These  symbols  will  be  used 
throughout  the  remainder  of  this  paper.     See  Executive  Orders  and  Proc- 
lamations, 1903,  p.  89. 

2  This  plan  is  of  sufficient  importance  to  deserve  a  brief  description. 
The  following  description  was  given  to  the  writer  in  1904  by  the  manager  of 
the  Manila  branch  of  one  of  the  large  English  exchange  banks :  An  amount 
equivalent  to  about  32  per  cent  of  the  regular  salary  is  given  to  Euro- 
pean employees  each  year  to  allow  for  the  depreciated  gold  value  of  the 
dollar.     The  origin  of  this  allowance  was  as  follows:    Salaries  in  the 
early  days  were  fixed  in  Mexican  dollars  before  the  gold  value  of  that  dollar 
had  depreciated  through  the  fall  in  the  price  of  silver.     As  a  result  of  this 
depreciation,  employees  of  the  Bank  found  the  gold  values  of  their  incomes 
rapidly  declining  and  requested  that  their  salaries  be  fixed  upon  the  gold 
basis.     The  directors  of  the  Bank  maintained  that  although  the  purchasing 
power  of  the  Mexican  dollar  over  imported  goods  or  in  the  home  land  had 
greatly  depreciated  [?],  its  purchasing  power  in  the  colonies  themselves  and 
other  places  throughout  the  Orient  over  local  produce,  labor,  etc.,  had  not 
materially  declined.     They  reasoned  that  the  employees  of  the  Bank  ex- 
pended about  one  half  of  their  salaries  for  house-rents,  domestic  foods, 
other  purely  local  supplies,  and  servants,  and  that  the  other  half  was  sent 
home  or  invested  in  goods  imported  from  gold-standard  countries.     They 
accordingly  agreed  to  permit  all  European  employees  of  the  Bank  to  purchase 
sterling  drafts  of  the  Bank  to  the  amount  of  half  their  salaries  at  the  rate  of 
three  shillings  and  four  pence  to  the  dollar.     These  drafts  could  be  commuted 
into  local  currency  at  the  rate  of  the  day  if  the  employee  wishes  to  spend  this 
exchange  allowance  in  the  Philippines. 


CURRENCY  PROBLEM  OF  MILITARY  GOVERNMENT      263 

Use  of  Both   United  States  Currency  and  Local  Currency 
for  Fiscal  Operations  of  Government 

The  third  plan  was  a  combination  of  the  other  two, 
i.e.  the  adoption  of  both  local  currency  and  United  States 
currency. 

Being  confronted  with  the  horns  of  an  awkward  dilemma 
the  Military  Government  adopted  the  proverbial  Anglo- 
Saxon  course  and  tried  to  seize  both  of  them,  a  course 
which  as  a  permanent  arrangement  would  have  been  in- 
tolerable, but  which  as  a  makeshift  for  a  few  years  was 
endurable,  thanks  largely  to  the  unusual  stability  of  the 
silver  market  during  the  fiscal  years  1899  and  I9OO.1 

It  is  difficult  to  describe,  at  once  briefly  and  accurately, 
the  plan  followed,  because  different  departments  of  the 
Military  Government  followed  quite  different  plans,  and 
the  same  department  often  shifted  from  one  plan  to  an- 
other. During  the  entire  period  of  the  Military  Govern- 
ment and  the  early  part  of  that  of  the  Civil  Government 
there  was  confusion  in  the  matter  of  the  ratio  in  which 
one  currency  should  be  computed  in  terms  of  the  other  in 
receipts  and  expenditures  and  in  the  accounting  of  fiscal 
officers.2  Paymaster-General  A.  E.  Bates,  in  a  letter  to 
the  Secretary  of  War,  October  17,  1900,  said:3 

1  The  range  between  the  highest  and  lowest  London  price  of  silver  for  the 
two  years  was  only  7.8  per  cent.     Cf.  chart,  p.  251. 

2  A  letter  of  the  Military  Auditor  to  the  Secretary  of  the  Military  Gov- 
ernor, October  23,  1899,  said :  "At  the  present  time  there  are  four  different 
rates  of  conversions. 

1.  The  rate  telegraphed  from  Washington  to  the  chief  quartermaster  of 
this  department  and  used  in  the  quartermaster's  department  here,  $0.474 
in  gold  for  i  Mexican  dollar  or  peso. 

2.  The  rate  used  by  the  subsistence  department,  $0.481,  a  rate  formerly 
in  use  by  that  department,  and  ordered  continued  by  the  Governor-General 
in  the  Philippines. 

3.  The  rate  used  at  the  custom-house  in  the  payment  of  employees  whose 
salaries  are  fixed  in  gold,  $0.50. 

4.  The  bank  rate,  to-day  $0.485,  necessarily  used  by  the  Treasurer  should 
he  have* to  deposit  gold  and  take  credit  in  Mexican.  .  .  ."    Edwards,  p.  36, 

3  Edwards,  pp.  61-62. 


264  THE  PHILIPPINE  CURRENCY  REFORM 

"The  difficulties  in  connection  with  the  confused  state 
of  the  currency  in  the  Philippines  arise  in  adjusting  and 
auditing  the  accounts  of  the  collecting  and  disbursing 
officers  in  the  Islands  by  the  auditor  in  Washington,  where 
all  accounts  are  required  to  be  stated  in  terms  of  United 
States  currency.  The  Insular  Government  has  no  diffi- 
culty as  long  as  they  receive  and  pay  out  the  money  of  the 
Islands  at  its  nominal  value.  There  is  no  difficulty  with  the 
departments  of  the  army  as  long  as  ...  they  confine  their 
transactions  exclusively  to  the  United  States  currency. 
The  trouble  arises  when  it  is  necessary  to  use  money  for  the 
purchase  of  supplies  or  the  payment  of  native  labor,  and 
with  the  individuals  who  receive  their  pay  in  gold  and  are 
obliged  to  convert  it  into  the  currency  of  the  country." 

Into  the  details  of  this  confused  situation  we  need  not  go. 
The  reader  who  is  interested  in  them  will  find  a  mass  of 
correspondence  on  the  subject  carefully  collected  by 
Clarence  R.  Edwards  in  the  pamphlet  on  Currency  and  Ex- 
change in  the  Philippines,  already  cited  several  times.  Here 
we  shall  concern  ourselves  only  with  a  few  of  the  chief 
events. 

The  first  and  most  important  fact  to  note  is  that  the 
paymaster's  department  of  the  army  maintained  itself 
throughout  the  entire  period  upon  a  United  States  cur- 
rency basis.  Its  receipts  were  in  United  States  currency, 
and  were  mainly  obtained  by  direct  shipment  from  America, 
at  first  of  gold  and  silver  coin,  and  later  largely  of  paper 
currency.  This  United  States  money  acted  in  one  respect 
like  an  ordinary  bank  check  —  it  performed  one  exchange 
operation  and  then  died,  so  far  as  the  Philippines  were 
concerned.  The  paymaster  having  received  it  from  the 
United  States  paid  it  to  the  soldiers;  and  the  soldiers  ex- 
changed it  at  the  exchange  shops  or  banks  for  local  cur- 
rency. The  banks  could  not  pay  it  out  in  any  considerable 
quantities  in  the  course  of  business;  they  accordingly 
allowed  it  to  accumulate  for  a  time,  and  then  sent  it 


CURRENCY  PROBLEM  OF  MILITARY  GOVERNMENT      265 

back  to  America.  A  not  uncommon  occurrence  during 
1898  and  1899,  the  writer  was  informed  on  good  authority, 
was  for  an  army  transport  bringing  millions  of  dollars  of 
United  States  currency  to  Manila  to  pass  a  liner  returning 
to  the  United  States  with  a  similar  amount  of  the  same 
kind  of  currency  which  the  banks  were  sending  back  be- 
cause they  could  not  use  it. 

After  September  26,  1899  considerable  amounts  of  United 
States  currency  were  obtained  by  the  Government  from 
the  banks  and  merchants  by  the  sale  to  them  of  drafts  on 
the  United  States  subtreasuries  at  par,  thereby  avoiding  the 
necessity  of  bringing  so  much  United  States  money  to  the 
Philippines.1  It  is  difficult  to  see  why  this  practice  could  not 
profitably  have  been  resorted  to  earlier  and  more  extensively . 
During  the  fiscal  year  1900  there  was  disbursed  in  the  pay- 
ment of  troops  in  the  Philippines  $14,640,000,  of  which 
$6,407,000  was  received  during  the  year  in  the  form  of 
shipments  from  the  United  States  and  $2,605,000  was  ob- 
tained from  Manila  banks  in  exchange  for  funds  placed  to 
the  credit  of  the  Manila  banks'  agents  in  New  York.2 

The  usual  practice  of  the  other  departments  of  the 
Military  Government,  whether  their  functions  were  mili- 
tary or  civil,  was  to  use  local  currency.  On  June  3,  1899 
General  Otis  wrote: 

"With  the  exception  of  the  disbursements  of  the  pay  de- 
partment nearly  all  receipts  and  expenditures  of  money 
incident  to  the  transaction  of  army  business  here  are  con- 
fined to  the  currency  of  the  country.  ...  All  contracts, 
verbal  or  written,  on  which  funds  are  disbursed  and  Which 
affect  labor,  rentals,  and  supplies  procured  in  the  Philip- 
pine market  are  made  and  executed  as  regards  the  expendi- 
ture of  money  upon  the  prevailing  currency  basis,  and 

1  Cf.  Ann.  Rep.  U.  S.  Paymaster-General,  1900,  in  House  Doc.,  56th  Con- 
gress, 2d  Sess.,  HI,  pp.  931-32 ;  also  Edwards,  pp.  6-8,  19,  31-32. 

2  An  itemized  statement  will  be  found  in  House  Doc.,  $6th  Congress, 
2d  Sess.,  VI,  p.  137. 


266  THE  PHILIPPINE  CURRENCY  REFORM 

amounts  due  are  paid  from  the  public  civil  funds  at  the  pre- 
vailing market  rates;  hence  this  class  of  business  is  not 
affected  in  any  wise  by  the  varying  rates  of  exchange."  1 

To  the  above  rule,  however,  there  were  some  exceptions  in 
addition  to  the  paymaster's  department.  They  were: 
the  pay  of  civilian  clerks  brought  from  the  United  States, 
the  disbursements  of  the  commissary  department,2  and 
domestic  and  foreign  postal  fees.3  Later,  arrangements 
were  made  for  the  acceptance  of  United  States  currency 
(in  addition  to  local  currency)  in  payment  of  custom  duties, 
internal  revenue  taxes,  and  various  public  fees,  at  official 
valuations  fixed  from  time  to  time  in  local  currency.4 
This  was  not  the  case,  however,  during  the  early  days  of 
the  Military  Government,5  and  complaints  were  occasionally 
made  that  in  the  matter  of  tax  payments  the  United 
States  Government  was  discriminating  against  its  own 
money.6 

1  Edwards,  p.  6. 

2  Ibid.,  p.  12. 

8  Cf.  General  Order  No.  38,  U.  S.  Military  Government  in  the  Philippines, 
Aug.  22,  1899. 

Local  currency  was  also  received  at  the  post  office,  but  at  rates  based  upon 
the  quarterly  valuations  of  foreign  coin  issued  by  the  U.  S.  Director  of  the 
Mint.  Cf.  Edwards,  pp.  15,  28,  and  29. 

4  Infra,  pp.  272  and  279-80. 

6  Edwards,  p.  15. 

6  The  difficulties  in  making  satisfactory  adjustments  in  the  case  of  opera- 
tions and  accounts  involving  the  two  currencies  were  partly  met  by  General 
Order  Number  65  issued  under  direction  of  the  War  Department,  April  10, 
1899.  It  provided  that,  The  money  accounts  of  disbursing  officers  of  the 
United  States  army,  "whether  for  purchases  or  services,  will  be  stated  in  the 
currency  under  which  the  indebtedness  is  incurred,  i.e.,  foreign  silver  or  gold, 
or  United  States  currency. 

"If  the  agreement  calls  for  either  foreign  silver  or  gold  the  account  shall 
be  stated  in  those  currencies,  respectively.  When  in  silver,  the  total  amount 
will  be  reduced  to  its  equivalent  in  the  gold  currency  in  use  in  the  country 
in  which  the  indebtedness  is  incurred  at  the  rate  of  exchange  which  may 
govern  at  the  time,  and  from  this  gold  currency  into  United  States  currency 
at  the  current  rate  of  exchange  at  the  date  of  payment.  .  .  . 

"The  amount  in  United  States  currency  having  been  arrived  at,  authority- 
is  hereby  given  for  checks  to  be  drawn  therefor  by  disbursing  officers  to  their 


CURRENCY  PROBLEM  OF  MILITARY  GOVERNMENT      267 


Efforts  of  Government  to  Maintain  a  Two  to  One  Ratio 

To  the  student  of  monetary  science  some  of  the  most 
suggestive  features  of  the  monetary  history  of  the  Philip- 
pines during  the  early  years  of  the  American  occupation 
concern  themselves  with  the  relations  existing  between  the 
Government  and  the  banks,  and  more  particularly  with 
the  efforts  made  to  hold  the  local  currency  at  a  gold  value 
of  $0.50  to  the  peso  or,  as  it  was  commonly  expressed,  at 
a  rate  of  "2  to  i." 

On  August  19,  1898  the  three  commercial  banks,  namely, 
the  Hongkong  and  Shanghai  Banking  Corporation,  the 
Chartered  Bank  of  India,  Australia,  and  China,  and  the 
Spanish-Filipino  Bank,  by  the  managers  of  their  Manila 
branches,  wrote  to  Brigadier  General  F.  V.  Greene  as 
follows: 

"Owing  to  the  large  amount  of  American  gold  being 
offered  us  for  exchange  into  Mexican  currency,  and  further, 
the  big  sterling  letters  of  credit  advised  us  in  favor  of  the 
paymasters  and  others  which  we  understand  will  be  re- 
quired in  Mexican  dollars,  as  this  is  the  only  acceptable 
coin  in  use  amongst  the  natives,  and  for  general  trading  pur- 
poses, while  we  are  anxious  to  give  the  soldiers  and  your 
Government  every  assistance  by  being  in  a  position  to  quote 
an  exchange  of  not  worse  than  2  Mexican  for  $i  gold,  we 

own  orders  in  United  States  currency  and  by  them  exchanged  at  local  fiscal 
agencies  of  the  United  States  where  possible,  or  at  local  banks,  for  the  neces- 
sary amount  in  the  coin  required  to  pay  the  creditor  in  the  money  originally 
agreed  upon,  and  authority  is  hereby  given  for  such  exchange  where  the 
creditor  declines  to  accept  check  payable  in  currency  of  the  United  States. 

"The  vouchers  for  accounts  will  be  made  to  show  the  debt  as  actually  in- 
curred, in  the  coin  in  which  payment  is  made,  and  the  reduction  from  this 
coin  to  United  States  currency,  the  rate  of  exchange  being  stated  on  the 
voucher,  and  the  amounts  stated  on  abstracts  and  account  current  in  United 
States  currency.  .  .  ."  Edwards,  p.  20.  Cf.  infra,  p.  288-90. 

This  order  has  been  quoted  at  length  because  it  represents  the  general 
policy  followed  until  some  time  after  the  establishment  of  civil  government 
in  the  islands  —  a  policy,  however,  to  which  there  appear  to  have  been  ex- 
ceptions. 


268  THE  PHILIPPINE  CURRENCY  REFORM 

shall  be  quite  unable  to  preserve  this  basis  of  exchange 
should  there  be  any  scarcity.  In  view  of  this,  and  in  order 
to  give  every  facility  for  the  exchange  of  United  States 
gold  currency,  we  may  require  to  import  clean  Mexican 
dollars,  duty  free,  and  shall  be  obliged  if  you  can  see  your 
way  to  grant  us  the  necessary  authority.  And  we  agree 
to  maintain  a  rate  of  exchange  of  not  less  than  two  Mexican 
dollars  for  one  gold  dollar  to  the  extent  of  our  import  of  Mexican 
dollars:' 1 

Upon  the  same  date  General  Greene  replied:  "  Your  prop- 
osition is  approved  by  General  Merritt,  and  you  are 
authorized,  until  further  notice,  to  import  Mexican  dollars 
free  of  duty  on  the  conditions  therein  stated. 2 " 

The  action  repealed  the  Spanish  legislation  of  1877  Pro~ 
hibiting  the  importation  of  Mexican  pesos,3  and  from  this 
time  until  January  14,  1904^  with  the  exception  of  a  short 
period  during  the  Boxer  trouble  in  China,5  there  was  a  vir- 
tually free  movement  of  Mexican  pesos  into  and  out  of 
the  Philippines.  In  other  words  the  Philippines  passed  from 
a  fiduciary  coin  standard  to  a  silver  standard,  with  the 
Mexican  peso  as  the  unit  of  value. 

A  glance  at  the  chart  on  page  251  will  show  that  for 
nearly  two  years  after  this  arrangement,  more  precisely 
until  July  1900,  when  the  Boxer  outbreak  occurred  in 
China,  the  price  of  silver  and  sterling  exchange  rates  in 
Manila  were  exceptionally  stable.  During  this  period  the 
extreme  range  of  sterling  exchange  fluctuations  was  be- 
tween a  maximum  of  24^.  (equivalent  at  par  exchange 
between  New  York  and  London  to  $0.494)  and  a  minimum 
of  22\d.  (equivalent  to  $0.456)  —  a  range  of  7.7  per  cent 
as  compared  with  one  of  25  per  cent  for  the  preceding  23 

1  Report  of  Taft  Philippine  Commission,  1900,  p.  85.    The  italics  are 
mine. 

2  Ibid,  p.  86.     Italics  are  mine. 

3  Cf.  supra,  pp.  247-48. 

4  Cf.  infra,  p.  335. 

5  Cf.  infra,  p.  269. 


CURRENCY  PROBLEM  OF  MILITARY  GOVERNMENT      269 

months  and  approximately  18  per  cent  for  the  succeeding 
23  months. 

Under  the  authority  thus  obtained  the  banks  made 
heavy  importations  of  Mexican  pesos,  and  gave  out  local 
currency  in  exchange  for  United  States  currency  or  United 
States  currency  in  exchange  for  local  currency,  at  varying 
rates,  always  maintaining  a  substantial  margin  of  profit 
between  their  buying  rate  and  their  selling  rate,  but  at 
no  time  until  the  end  of  July  1900  giving  less  than  two 
Mexican  pesos  for  one  dollar  of  United  States  currency. 
During  that  time  the  banks'  buying  rate  for  American  dol- 
lars varied  between  a  maximum  of  Pfs.  2.07  and  a  minimum 
of  Pfs.  2.00,  but  during  by  far  the  greater  part  of  the 
period  it  was  below  Pfs.  2.05.*  The  range  of  fluctuation,  it 
will  be  seen,  was  less  than  half  that  of  sterling  exchange 
rates.  In  so  far  as  United  States  currency  circulated,  it 
usually  did  so  at  the  rate  of  2  to  i. 

The  latter  part  of  July  1900,  there  was  a  substantial  rise 
in  the  London  price  of  silver  and  in  the  silver  exchanges, 
due  chiefly  to  the  demand  for  Mexican  pesos  for  the  pay- 
ment of  troops  and  the  purchase  of  supplies  incident  to  the 
military  operations  in  connection  with  the  Boxer  troubles 
in  China.2  The  agio  above  the  equivalent  of  a  2  to  i  rate 
which  the  maximum  sterling  exchange  rate  in  Manila  of  the 
period  gave  was  very  small,  i.e.,  less  than  i|  per  cent,  rep- 


1  A  table  of  the  bank  rates  for  the  period  is  given  in  the  Report  of  the  Taf t 
Philippine  Commission,  1900,  p.  86. 

2  Sterling  rates  in  Manila  for  four  months  paper  rose  from  a  maximum 
of  24d.  for  June  to  24^.  for  July,  24^.  for  August,  2$\d.  for  September,  and 
25-ifyf.  for  October— the  October  rate  being  the  highest.    To  convert  these 
rates  to  a  telegraphic  transfer  basis  about  |<f .  should  be  deducted  from  each 
one  representing  interest  at  the  London  market  rate  which  at  this  time  was 
in  the  neighborhood  of  4  per  cent  on  six  months  paper.    This  would  make  the 
maximum  telegraphic  transfer  rates  for  these  months  respectively  about  as 
follows:  June,  23^. ;  July,  24-^. ;  August,  24^. ;  September,  2 4fd;  and 
October,  24^.    On  the  oasis  of  par  exchange  between  New  York  and 
London  a  24$^.  telegraphic  rate  in  Manila  is  approximately  equivalent  to 
a  $0.50  value  to  the  Mexican  dollar  or  a  2  to  i  rate. 


270  THE  PHILIPPINE  CURRENCY  REFORM 

resenting  a  United  States  currency  rate  of  Pfs.  1.97  to  $i. 
Under  these  circumstances  there  is  little  question  that  a  2 
to  i  rate  could  easily  have  been  maintained  by  the  banks, 
with  the  cooperation  of  the  Government  —  possibly  with 
the  aid  of  an  export  duty  on  Mexican  pesos — had  the  banks 
made  a  reasonable  effort  to  do  so.  But  on  July  3 1  the  banks 
broke  their  agreement  by  quoting  a  buying  rate  for  United 
States  currency  of  Pfs.  i.gS.1  The  effect  of  this  reduction 
in  the  rate  was 

"immediately  to  create  a  discrimination  against  American 
money.  Small  traders  took  advantage  of  the  situation 
and  would  accept  [American]  money  only  at  the  rate  of 
[Pfs.]  1.50,  i. 60,  1.70,  or  1.75  for  a  dollar,  resulting  in  very 
great  loss  to  all  who  had  to  make  payments  of  any  kind  in 
American  money.  The  people  reasoned  that  if  American 
money  could  go  down  to  [Pfs.]  1.98  it  could  go  very  much 
lower,  and  that  there  was  no  reason  why  it  should  not  be  up- 
on a  par  with  the  Mexican  dollar.  There  was  much  disturb- 
ance in  business  circles,  and  the  conditions  were  highly  un- 
satisfactory." 2 

At  this  juncture,  the  writer  believes,  the  Government 
should  have  taken  two  positive  measures :  (i)  It  should  have 
called  the  banks'  attention  to  the  agreement  of  August  19, 
1898,  by  which,  in  consideration  of  the  authority  to  import 
Mexican  dollars  free  of  duty,  they  had  promised  "to 
maintain  a  rate  of  exchange  of  not  less  than  two  Mexican 
dollars  for  one  dollar  gold  to  the  extent  of  ...  [their] 

1  The  Manila  Times  of  August  6,  1900  said :  "The  banks  in  Manila  are 
discounting  United  States  currency  at  2  per  cent ;  the  merchants  are  follow- 
ing the  posted  notices  of  the  banking  houses  and  exacting  the  acceptance 
by  their  American  customers  of  the  same  rate.  .  .  .    The  Chinese  mer- 
chants as  a  class  and  almost  to  a  unit  refuse  to  accept  American  money 
except  at  the  banks'  rate  of  discount;  few  of  the  merchants  on  the  Escolta 
[the  principal  business  street  of  Manila]  seem  disposed  to  do  it,  yet  there  arc 
a  few  who  will  continue,  make  or  break,  to  receive  it  at  the  old  rate.  ..." 

2  Rep.  Taft  Phil.  Com.  1900,  p.  87. 


CURRENCY  PROBLEM  OF  MILITARY  GOVERNMENT      271 

import  of  Mexican  dollars,"  1  and  should  have  insisted  that 
they  make  good  their  agreement.  The  Military  Govern- 
ment had  ample  legal  powers  to  do  this,  and  in  addition  had 
an  effective  weapon  in  its  control  over  government  deposits 
in  the  banks.  On  August  1 8,  1900  it  had  on  deposit  in  the 
Hongkong  and  Shanghai  Banking  Corporation,  in  round 
numbers,  $118,000  and  Pfs.  2,441,000;  and  in  the  Char- 
tered Bank  of  India,  Australia,  and  China,  Pfs.  3,340,000. 
Had  it  threatened  to  withdraw  these  deposits,  the  banks 
would  almost  certainly  have  had  a  new  light.  Under  the 
circumstances  the  banks'  agreement  appears  to  have  been 
a  very  risky  one,  but  they  were  experts  in  dealing  in  futures 
in  the  foreign  exchanges,  and  having  deliberately  assumed 
the  risk,  and  for  nearly  two  years  profited  thereby,  the 
Government  should  have  insisted  that  they  pay  the  price. 
(2)  Inasmuch  as  the  banks'  burden  in  maintaining  the  2  to 
i  rate  clearly  would  have  been  increased  by  the  exportation 
of  Mexican  pesos  on  the  part  of  Chinese  exchange  houses, 
and  others  not  parties  to  the  agreement  of  August  19,  1900, 
the  Government  might  well  have  come  to  the  assistance  of 
the  banks  by  prohibiting  through  an  export  tax  or  other- 
wise the  exportation  of  Mexican  pesos  from  the  Islands. 
Such  a  prohibition,  by  preventing  the  quantity  of  currency 
from  being  reduced,  would  have  held  down  exchange  rates, 
as  did  a  similar  prohibition  early  in  1906  when  a  very  much 
greater  rise  in  the  price  of  silver  threatened  to  drive  the 
newly  introduced  Philippine  gold  standard  coins  out  of 
the  country  or  into  the  melting  pot.2 

Instead  of  taking  such  positive  measures,  the  Government 
temporized,  much  to  the  satisfaction  and  the  profit  of  the 
banks. 

On  August  10,  1900  the  two  depositary  banks  proposed, 
as  "the  only  remedy  we  can  suggest,"  to  keep  the  rate  for 
the  public  at  2  to  i,  a  temporary  measure  according  to 
which  the  banks  were  to  purchase  from  the  public  such 

1  Supra,  p.  268.  z  Infra,  p.  354. 


272  THE  PHILIPPINE   CURRENCY  REFORM 

United  States  currency  as  was  handed  over  the  counter, 
at  the  rate  of  2  to  i,  crediting  the  United  States  currency  so 
received  to  the  Government's  United  States  currency  de- 
posit account,  and  debiting  the  local  currency  paid  out  to 
the  Government's  local  currency  deposit  account.1  The 
burden  of  thus  purchasing  United  States  currency  at  a 
price  above  the  natural  market  rate  would  thereby  fall 
upon  the  Government  and  not  upon  the  banks.  Further- 
more the  banks  would  be  enabled  in  this  way  to  exchange 
at  a  high  price  their  own  United  States  currency  holdings. 
On  August  ii  the  Military  Governor  accepted  the  banks' 
proposition  as  "a  temporary  one  and  terminable  at  the 
will  of  the  Government."  2 

The  result  of  this  arrangement  is  described  by  the  Taft 
Philippine  Commission  in  its  Report  of 


"[It]  enabled  the  public  at  any  time  to  obtain  at  the 
banks  two  Mexican  dollars  for  a  dollar  of  American  money, 
so  that  the  public  were  furnished  with  a  stable  currency, 
and  American  money  was  freely  accepted  in  business 
transactions  at  the  ratio  stated,  because  it  could  at  any 
time  be  transferred  into  Mexican  money.  .  .  .  The  practi- 
cal working  of  this  regulation  has  been  to  materially  reduce 
the  Government's  .  .  .  [large  deposit  of  Mexican  money], 

1  Rep.  Taft  Phil.  Com.,  1900,  pp.  87-88. 

2  The  acceptance  was  made  public  August  n,  in  the  form  of  General 
Order  No.  107  of  the  Military  Governor.     It  provided  : 

"I.  Until  further  orders  United  States  currency  tendered  in  payment  of 
custom  duties,  internal  revenue  taxes,  and  other  public  dues  collected  by 
the  Military  Government  in  any  of  its  branches,  shall  be  received  at  the 
rate  of  two  Mexican  dollars  for  one  dollar  of  United  States  currency,  and 
will  be  invoiced  to  the  Treasurer  of  Public  Funds  and  receipted  for  by  him  at 
that  rate. 

"II.  All  civilian  employees  under  the  Military  Government  will  be  paid, 
at  the  election  of  the  employee,  in  either  United  States  currency  or  Mexican 
silver,  and  when  payment  is  made  in  the  latter  it  will  be  at  the  rate  of  two 
Mexican  dollars  for  one  United  States  dollar.  .  .  ."  Special  Orders,  General 
Orders,  and  Circulars,  Office  of  United  States  Military  Governor,  Philippine 
Islands,  1900. 

8  Page  88. 


CURRENCY  PROBLEM  OF  MILITARY  GOVERNMENT      273 

and  to  increase  its  deposit  of  American  money,  in  some 
weeks  with  startling  rapidity.  ..." 

Taking  four  dates  approximately  a  month  apart,  we  find  that 
the  complexion  of  the  Government's  deposit  balances  in 
the  local  banks  changed  as  follows: l 

August  1 8,  1900     .  .  .  $117,950  Pfs.  5,780,652 

September  15,  1900  .  .  811,608  5,165,094 

October  17,  1900    .  .  .  1,850,951  4,723,544 

November  17,  1900  .  .  3,021,870  2,876,974 

Computing  United  States  currency  on  a  2  to  i  basis,  it  will 
be  observed  that  whereas  on  August  18,  4  per  cent  of  the 
deposits  were  United  States  currency  and  96  per  cent  local 
currency,  on  November  17,  68  per  cent  were  United  States 
currency  and  32  per  cent  local  currency.  Actually  the 
transfers  were  greater  than  the  decline  in  the  local  currency 
balances  show,  since  the  receipts  from  customs  duties  and 
internal  revenue  taxes  were  to  a  considerable  extent  in  the 
form  of  checks  payable  in  local  currency,  so  that  the  supply 
of  local  currency  was  being  constantly  replenished.  This 
fact  is  evidenced  by  the  amount  of  the  increase  in  the  United 
States  currency  balances.  The  Government  found  conso- 
lation in  the  claim  that  in  one  sense  the  loss  was  "only  ap- 
parent, not  real,"  because  "the  treasury  .  .  .  received  for  its 
Mexican  money  as  much  as  it  cost,  and  for  most  of  it 
more,"  since  it  was  mainly  taken  into  the  treasury  when 
the  prevailing  ratio  was  higher  than  2  to  i.2 

A  measure  of  some  importance  taken  about  a  week  be- 
fore the  above-mentioned  arrangement  was  made  with  the 
banks,  and  calculated  to  lessen  the  demand  for  the  appreci- 
ating Mexican  peso,  was  the  issuance  of  an  order  of  the 
Military  Governor  directing  the  collector  of  customs  and 
the  collector  of  internal  revenue  to  receive  United  States 
currency  in  payment  of  taxes  at  the  rate  of  2  to  i.3  To 

1  Semi-weekly  figures  are  given  in  Rep.  Taft  Phil.  Com.  1900,  p.  88. 

2  Ibid.,  pp.  90-91.  3  Ibid.,  p.  87. 

T 


274  THE  PHILIPPINE  CURRENCY  REFORM 

the  same  end  government  disbursements  were  made  largely 
in  the  money  of  the  United  States.1 

Proposal  to  Introduce  the  British  Dollar  into  the  Circula- 
tion. A  second  remedial  measure  suggested  by  the  banks 
was  the  introduction  into  the  Philippine  circulation  of  the 
British  dollar.  This  was  a  dollar  of  416  grains  of  silver 
.900  fine,  containing  when  new  therefore  two  thirds  of  one 
per  cent  less  pure  silver  than  a  new  Mexican  peso.  It  had 
been  coined  at  Bombay  since  1895-96,  with  the  idea  of  pro- 
viding a  distinctively  British  silver  standard  coin  to  dis- 
place the  Mexican  peso  in  the  Orient,  particularly  in  the 
Straits  Settlements  and  China.  The  argument  for  its  in- 
troduction into  the  Philippines  was  that  it  was  an  equally 
good  coin  with  the  Mexican  peso,  and,  not  being  in  such 
great  demand  at  the  time  of  the  Boxer  troubles,  was  ob- 
tainable at  a  lower  price.  The  Philippine  authorities  very 
wisely  rejected  this  proposal,  later  citing  the  following 
reason: 

"The  so-called  British  dollar  at  the  time  could  have  been 
imported  into  Manila  on  the  basis  of  about  [Pfs.]  2.01  or 
[Pfs.]  2.02  for  $i  American  gold,  but  its  bullion  value  as 
compared  with  the  Mexican  is  very  difficult  to  ascertain  with 
clearness,2  and  the  apparent  effect  of  its  introduction  would 
have  been  to  enable  the  local  banks  to  have  placed  it  in 
their  vaults  in  lieu  of  the  Mexican  currency  which  the 
Government  had  there  deposited  to  the  amount  of  upwards 
of  [Pfs.]  4,000,000,  and  to  export  to  China  the  Mexican 
currency  belonging  to  the  Government,  and  thereby  se- 
cure a  very  large  profit  to  themselves  by  the  substitution. 
Meanwhile,  an  additional  element  of  uncertainty  would 
have  been  introduced  into  the  money  of  the  Islands,  and 
the  certainty  of  continued  stability  of  ratio  between  the 

1  Rep.  Phil.  Com.,  1901,  Part  I,  p.  95. 

2  This  assertion  cannot  be  substantiated.     It  was  just  as  easy  to  know  the 
bullion  value  of  one  as  of  the  other.     Both  dollars  were  "honest"  full  weight 
dollars  when  new,  and  their  weights  and  finenesses  were  matters  of  law. 


CURRENCY  PROBLEM  OF  MILITARY  GOVERNMENT      275 

different  currencies  under  such  circumstances  would  have 
been  far  from  clear. "  1 

A  10  Per  Cent  Export  Tax  on  Mexican  Pesos.  After 
the  Government's  local  currency  deposits  in  the  banks 
had  been  reduced  by  about  Pfs.  2,000,000  and  some- 
thing like  5,000,000  Mexican  pesos  had  been  exported  from 
the  Islands,  the  Government,  i.e.,  the  United  States  Phil- 
ippine Commission,  which  had  taken  over  the  civil  govern- 
ment of  the  Islands  from  the  military  authorities  September 
i,  1900,  passed  a  law,  November  i2,2  imposing  a  tax  of 
10  per  cent  upon  the  exportation  of  Mexican  pesos.  The 
tax  was  prohibitive  and  was  meant  to  be.3 

Other  Friction  Between  Government  and  Banks.  The  fric- 
tion between  the  Military  Government  and  the  banks, 
over  the  question  of  the  maintenance  of  the  2  to  i  rate 
in  accordance  with  the  agreement  of  August  19,  1898, 
was  but  part  of  a  general  situation  characterized  by  con- 
siderable animosity  between  the  Government  and  the 
banks  arising  from  a  controversy  over  the  unwillingness  of 
the  banks  to  accept  from  the  public  United  States  cur- 
rency deposits.  An  account  of  that  controversy  is  given 
in  Appendix  A  (pp.  383-85). 

Decline  in  Price  of  Silver.  With  the  suppression  of  the 
Boxer  trouble  in  China  by  the  allied  powers,  the  gold  price 
of  silver  and  of  Mexican  pesos  fell.  The  decline  which  set 
in  with  the  opening  of  the  year  1901  continued  almost  with- 
out interruption  until  the  spring  of  1903,  as  will  be  seen  by 
reference  to  the  chart  on  page  251.  It  seemed  that  the  forces 
controlling  the  silver  market  were  determined  to  give  the 
Philippine  authorities  a  varied  and  comprehensive  experi- 

1  Rep.  Taft  Phil.  Com.,  1900,  p.  87. 

*  For  text  of  this  Act,  see  ibid.,  p.  305. 

*  In  the  three  days  that  elapsed  between  the  publication  of  the  proposed 
legislation  placing  a  tax  upon-  the  export  of  Mexican  pesos  and  its  enact- 
ment Pfs.  1,133,500  Mexican  currency  was  exported,  of  which  Pfs.  650,000 
was  by  two  of  the  banks  which  undertook  the  agreement  of  August  19, 
1898.    Ibid.,  pp.  89-90. 


276  THE  PHILIPPINE   CURRENCY  REFORM 

ence  with  the  difficulties  of  a  dual  monetary  standard. 
There  were  two  years  of  a  remarkably  stable  silver  market 
(from  the  summer  of  1898  to  the  summer  of  1900),  then  a 
half  year  of  a  rapidly  rising  market,  followed  by  two  years 
of  a  rapidly  falling  market.  We  have  discussed  the  mone- 
tary experiences  of  the  first  two  periods,  and  now  come  to 
those  of  the  third,  out  of  which  developed  the  agitation 
in  favor  of  putting  the  Philippines  upon  a  gold  standard. 


CHAPTER  III 

DIFFICULTIES  WITH  A  DEPRECIATING  SILVER  STANDARD 

WE  may  now  consider  the  experiences  of  the  Civil  Gov- 
ernment with  a  fluctuating  and  depreciating  standard  of 
value  for  the  period  from  January  1901  to  the  spring  of 
1903- 

Quasi  Bimetallism 

The  extent  of  the  fluctuations  in  the  gold  value  of 
the  peso  is  shown  by  the  chart  on  page  251.  The  aver- 
age monthly  telegraphic  transfer  rate  on  London  declined 
7.1  per  cent  from  January  to  December  1901.  From 
January  1902  the  rate  declined  almost  uninterruptedly 
until  it  reached  i8||  d.  for  February  1903.  the  lowest 
average  monthly  rate  that  ever  existed  in  the  Philippines, 
representing  a  decline  in  fourteen  months  of  23.2  per  cent. 
Throughout  the  year  1901,  after  January,  the  va'ue  of 
the  Mexican  peso,  as  measured  by  sterling  exchange  rates, 
vras  at  all  times  substantially  above  its  bullion  value 
.easured  by  the  London  prompt  price  of  silver;  but  this 
was  not  true  during  the  year  1902  nor  during  the  first  two 
months  of  1903,  when  the  two  values  fluctuated  very 
closely  together.  The  reason  for  this  change  will  be  found 
largely  in  the  discontinuance  after  the  beginning  of  1902 
of  the  Government's  efforts  to  sustain  artificially  the  2 
to  i  rate.  After  the  opening  of  the  year  1901  the  decline 
of  silver  was  so  pronounced  that  it  was  no  longer  neces- 
sary to  continue  the  10  per  cent  export  tax  on  Mexican 
pesos  in  order  to  prevent  the  Manila  price  of  a  United 
States  dollar  from  falling  below  two  pesos.  From  that 

277 


278  THE  PHILIPPINE  CURRENCY  REFORM 

time  forward  the  danger  was  in  the  other  direction,  i.e., 
that  the  rate  would  go  above  2  to  i.  By  continuing  this 
restriction  upon  the  exportation  of  Mexican  pesos,  and 
thereby  keeping  the  supply  artificially  high,  the  Govern- 
ment held  down  the  gold  value  of  the  local  dollar  and 
made  its  task  of  maintaining  a  2  to  i  rate  more  difficult. 
Rather  tardily  it  repealed  the  tax  August  31,  1901.  From 
that  date  until  January  14,  1904  there  were  no  legal  re- 
strictions on  the  flow  of  Mexican  pesos  to  or  from  the 
Philippines. 

Until  the  end  of  the  year  1901  the  Government  ac- 
complished the  increasingly  difficult  task  of  maintaining 
the  two  currencies  in  general  circulation  at  a  rate  of  2  to  i. 
It  did  so  by  declaring  this  rate  its  official  rate,  and  by 
continually  pumping  into  the  circulation,  through  the 
payment  of  government  obligations,  large  quantities  of 
the  under- valued  United  States  currency,  and  by  receiving 
in  payments  to  itself  large  and  increasing  proportions  of 
local  currency  which  it  placed  on  deposit  in  the  local  banks.1 
In  this  way,  and  by  using  its  heavy  balances  at  the  banks 
for  the  maintenance  of  the  2  to  i  rate,  the  Government 
maintained  a  quasi  bimetallism  at  a  3  2^  to  i  ratio.  This 
is  the  nearest  approach  to  bimetallism  known  to  the  writer 
anywhere  in  the  world  since  the  great  movement  for  the 
demonetization  of  silver  in  the  early  seventies  of  the  last 
century.2  It  is  a  curious  episode  in  that  this  bimetallism 
was  unconsciously  established  by  a  Republican  adminis- 
tration which  obtained  office  as  the  result  of  a  campaign  in 
which  it  stood  as  the  archenemy  of  national  bimetallism. 

1  On  February  2,  1901  the  Government's  balances  in  the  Manila  banks 
were:  $2,686,929  and  Pfs.  2,107,324;  on  October  9  they  were:  $2,388,687 
and  Pfs.  9,594,125.    Rep.  Phil.  Com.,  Dec.  1901,  pp.  96  and  97. 

2  There  were  free  coinage  of  gold  in  the  United  States,  free  coinage  of 
Mexican  pesos  in  Mexico  (although  with  certain  brassage  charges  and  taxes), 
and  an  unrestricted  flow  of  both  kinds  of  money  into  and  out  of  the  Philip- 
pines.   The  Mexican  peso  was  unlimited  legal  tender,  and  although  United 
States  currency  was  not  legal  tender,  it  was  receivable  for  all  government 
dues  and  legally  current  in  the  Islands. 


DEPRECIATING  SILVER  STANDARD  279 

Concerning  the  success  of  the  plan  the  Philippine  Com- 
mission said  in  its  report  of  October  15,  1901 : 1 

"The  effect  of  the  military  order  .  .  .  authorizing  the 
exchange  of  2  pesos  of  local  currency  for  $i  of  money  of  the 
United  States,  coupled  with  the  legislation  ...  to  secure 
equal  facilities  for  the  deposit  and  payment  of  both  cur- 
rencies in  the  local  banks,  and  the  payment  of  sums  due 
from  the  Insular  Government  to  employees  and  others 
mainly  in  money  of  the  United  States,  has  been  to  secure 
an  entirely  stable  currency  throughout  the  Islands  since  the 
nth  day  of  August,  1900,  down  to  the  date  of  this  report, 
and  it  is  considered  that  the  securing  of  this  result  has  been 
a  very  great  advantage  to  all  the  people  of  the  Islands." 

By  the  end  of  the  year  1901  silver  had  reached  such  a 
low  point  that  the  burden  of  maintaining  the  2  to  i  rate 
was  more  than  the  Government  could  carry,  and  on  Janu- 
ary i,  1902,  the  official  rate  was  raised  from  2  to  i  to  2.10 
to  i,  the  first  departure  from  the  2  to  i  basis  which  was 
originally  established  in  August  1898. 2 

Official  Exchange  Rales  in  Philippines.  We  may  now 
summarize  briefly  the  action  of  the  Government  in  the 
matter  of  official  rates  from  August  1900  to  the  introduc- 
tion of  the  money  of  the  new  gold-exchange  standard  the 
latter  part  of  July  1903.  In  declaring  its  official  rates, 
the  Civil  Government  was  prevented  from  changing  them 
oftener  than  once  a  quarter,  at  first  by  orders  from  the 
Secretary  of  War,  and  subsequently  down  to  July  i,  1902 
by  law.3  Because  of  the  great  instability  of  the  price  of 
silver  this  quarterly  period  proved  to  be  too  long,  and 
often  led  to  fiscal  difficulties.  Accordingly  an  Act  of 
Congress  of  July  i,  1902  (section  84)  authorized  the  Civil 
Governor  in  his  discretion  to  fix  "the  equivalent  rates  of 
the  money  in  circulation  .  .  .  with  the  money  of  the  United 

1  Page  98.  2  Cf.  supra,  pp.  267-68. 

•Section  8  of  an  Act  of  the  Philippine  Commission  of  Sept.  17,  1901, 
later  affirmed  by  Act  of  Congress  of  March  8,  1902. 


280 


THE   PHILIPPINE  CURRENCY  REFORM 


States  as  often  as  once  in  ten  days."  Even  this  ten-day 
limitation  at  times  proved  embarrassing.  The  following 
table  gives  the  official  rates  to  the  end  of  the  year  1903  : 


OFFICIAL  RATE 
PFS.  TO  $i 

U.  S.  CURRENCY 
EQUIVALENT 
$  TO  PFS.  i. 

PERIOD  COVERED 

DATE  OF  ORDER  ESTAB- 
LISHING RATE 

2.OO 

0.50 

Aug.  n,  1900,  to 

Aug.  n,  1900 

June  30,  1901 

2.00 

0.50 

July    i,    1901,   to 

July  i,  1901 

Sept.  30,  IQOI 

2.00 

0.50 

Oct.    i,   1901,  to 

Sept.  25,  1901 

Dec.  31,  1901 

2.10 

0.449 

Jan.    i,    1902,   to 

Dec.  26,  1901 

Mar.  31,  1902 

2.27 

0.441 

Apr.    i,   1902,   to 

Mar.  27,  1902 

June  30,  1902 

2-35 

0.426 

July   7,1  1902,  to 

July  7,  1902 

Sept.  22,  1902 

2.40 

0.417 

Sept.  23,  1902,  to 

Sept.  23,  1902 

Oct.  21,  1902 

2.46 

0.407 

Oct.    22,    I9O2,    tO 

Oct.  22,  1902 

Nov.  10,  1902 

2.50 

0.40 

Nov.  n,  1902,  to 

Nov.  n,  1002 

NOV.   22,   I9O2 

2.60 

0.385 

Nov.  23,  1902,  to 

Nov.  23,  1902 

Jan.  24,  1903 

2.66 

0.376 

Jan.  25,  1903,  to 

Jan.  25,  1903 

Mar.  10,  1903 

2.60 

0.385 

Mar.  n,  1903,  to 

Mar.  n,  1903 

Apr.  2,  1903 

2.55 

0.392 

Apr.   3,   1903,   to 

Apr.  3,  1903 

Apr.  30,  1903 

2.50 

0.40 

May  i,  1903,  to 

May  i,  1903 

May  13,  1903 

245 

0.408 

May  14,  1903,  to 

May  14,  1903 

July  17,  1903 

2.38 

0.420 

July  1  8,  1903,  to 

July  1  8,  1903 

July  31,  1903 

2.30  and  1.15 

0-435 

Aug.    i,  1903,   to 

July  31,  1903,  and 

for  new  peso 

Dec.  31,  1903 

Proclamation  of 

Oct.  23,  1903 

1  There  is  a  hiatus  of  six  days  here.     Subsequent  orders  were  issued  for 
at  least  ten  days  and  until  further  order." 


DEPRECIATING  SILVER  STANDARD  281 

Many  of  these  changes,  it  will  be  observed,  were  very 
pronounced.  From  December  31,  1901  to  October  22, 

1902,  a  period  of  less  than  ten  months,  the  gold  value  of 
the    Mexican   peso,    as   measured    by    the   Government's 
official  rates,  fell  18.7  per  cent;   and  for  the  ten  months 
ending  October  1902  the  average  monthly  value  as  meas- 
ured by  sterling  exchange  rates  (cable  transfers)  fell  11.4 
per  cent.     Taking  the  dates  of  the  extreme  rates  we  find  a 
variation  in  the  official  rate  from  Pfs.  2.00  to  $i  for  the 
quarter  ending  December  31,  1901  to  Pfs.  2.66  to  $i  for 
the  one  and  a  half  month  period  beginning  January  25, 

1903,  representing  a  decline  in  the  gold  value  of  the  peso 
of  24.8  per  cent  during  a  period  of  less  than  thirteen  months. 
During   practically  the   same   period,    January    1902    to 
January  1903,  inclusive,  the  average  monthly  value  of  the 
peso  as  expressed  in  sterling  exchange  rates  fell  16.9  per 
cent.    The  range  of  fluctuation  ran  as  high  as  8.2  per  cent 
in  a  month  (i.e.,  for  November  1902).     When  one  notes 
that  during  the  same  period  of  thirteen  months  the  range 
between  the  highest  and  lowest  rates  for  bankers'  sight 
bills  in  New  York  on  London  was  less  than  0.6  per  cent, 
the  extent  of  these  Philippine  exchange  fluctuations  will 
be  better  appreciated.     Out  of  the  resulting  disturbances 
in  the  fiscal  affairs  of  the  Government,  in  the  financing  of 
foreign  trade,  and  in  the  individual  finances  of  Americans 
in  the  army,  the  civil  government,  and  private  business 
in  the  Philippines,  grew  an  agitation  for  the  adoption  of 
the  gold  standard. 

The  Silver  Standard  and  the  Government 's  Finances 

The  chief  factor  in  the  movement  for  currency  reform  was 
the  interference  of  the  silver  standard  with  the  Govern- 
ment's finances.  This  interference  occurred  chiefly  in  two 
ways :  (i)  Financial  losses  and  uncertainties  in  the  budget. 
(2)  Accounting  difficulties. 


282  THE  PHILIPPINE  CURRENCY  REFORM 

Financial  Losses  and  Uncertainties  in  the  Budget.  Since 
the  business  of  the  country  was  conducted  almost  en- 
tirely with  local  currency,  the  Government's  revenues  were 
naturally  received  largely  in  that  currency.  Its  expendi- 
tures, on  the  other  hand,  were  largely  upon  a  United  States 
currency  basis,  i.e.,  either  in  United  States  currency,  or 
in  local  currency  at  the  official  rate  for  United  States  cur- 
rency, the  currency  in  which  the  obligation  was  expressed. 
Officials  and  clerks  brought  from  the  United  States  had  their 
salaries  fixed  in  terms  of  United  States  currency — in  America 
they  would  not  have  understood  Philippine  local  currency. 
Furthermore  the  Government  purchased  many  supplies 
in  the  United  States.  Obviously,  when  silver  was  de- 
preciating throughout  the  year  1902  and  the  fore  part  of 
1903  the  number  of  pesos  the  Government  was  compelled 
to  pay  for  each  $100  of  United  States  currency  obligations 
rose  from  200  to  210,  227,  235,  and  so  on  to  the  maximum 
of  266. 

Meanwhile,  however,  there  was  no  corresponding  increase 
in  the  Government's  revenues.  Even  under  ordinary 
circumstances  these  revenues  would  have  been  received 
largely  in  local  currency ;  but  conditions  at  this  time  arti- 
ficially discriminated  against  United  States  currency,  so 
that  a  larger  proportion  of  the  revenue  than  normally  was 
paid  in  local  currency.  The  discrimination  consisted  in 
the  fact  that  silver  was  continually  falling  and  that  the 
official  rate  for  United  States  currency  therefore  lagged 
behind  the  market  rate.  For  example,  when  the  Govern- 
ment was  receiving  United  States  currency  in  payment  for 
customs  duties  at,  say,  2.10,  the  banks  might  be  paying  for 
United  States  currency  Pfs.  2.15  or  Pfs.  2.20.  Naturally 
the  holder  of  United  States  currency  took  it  to  the  banks 
and  exchanged  it  for  local  currency,  and  then  paid  his  cus- 
toms duties  in  the  local  currency.  It  was  a  simple  case  of 
the  working  of  Gresham's  law.  The  Government  was  paid 
in  the  money  which  it  overvalued. 


DEPRECIATING  SILVER  STANDARD  283 

These  advances  in  the  official  rate  required  the  writing 
off  of  substantial  gold  values  in  the  treasury  balance.  For 
example,  on  January  i,  1902,  when  the  official  rate  was 
raised  from  Pfs.  2.00  to  Pfs.  2.10,  the  Treasurer  had  in  his 
hands  Pfs.  9,937,720.53.  At  the  former  rate  this  was 
worth  $4,968,860.26,  while  at  the  latter  it  was  worth  but 
$4,732,247.87,  representing  a  loss  of  $236,612.  The  cor- 
responding loss  due  to  the  change  in  the  official  rate  from 
Pfs.  2.10  to  Pfs.  2.27  on  April  i  was  $393, H2.1  Further- 
more, quoting  from  the  report  of  the  Auditor  for  the  fiscal 
year  1902,  "The  accounts  of  all  disbursing  officers  having 
been  expressed  in  United  States  currency,  in  anticipation 
of  the  adoption  of  gold  as  the  standard  of  value,  it  like- 
wise became  necessary  to  credit  these  officers  in  their 
accounts  with  the  difference  in  gold  value  between  the 
local  currency  in  their  hands  at  the  old  ratio  and  at  the 
new."  Basing  its  conclusion  upon  the  Auditor's  reports, 
the  Philippine  Commission  estimated  the  loss  arising  in 
these  ways  from  January  i,  1902  to  October  25,  1902  at 
approximately  $957,ooo.3  Inasmuch  as  there  was  no  cor- 
responding rise  in  local  currency  prices  in  the  Philippines 
during  this  period  of  rapid  decline  in  the  gold  value  of  the 
peso,  the  above  loss  was  obviously  a  book  loss  approxi- 
mately to  the  extent  that  the  Government  bought  supplies 
and  paid  wages  on  a  local  currency  basis;  it  was  a  real 
loss  to  the  Government,  however,  to  the  extent  to  which  its 
expenditures  were  made  upon  a  gold  basis.  Unfortunately 
the  published  records  do  not  afford  the  data  necessary  to 
differentiate  the  amount  of  the  book  loss  from  that  of  the 
real  loss. 

Although  there  was  a  very  large  real  loss  to  the  Govern- 
ment, it  was  not  like  sinking  the  money  in  the  ocean,  as 
the  Commission  claimed,4  for  to  a  large  extent  the  Gov- 

1  As  a  slight  offset  to  these  two  losses  there  was  a  gain  on  exchange  of 
about  $37,000.     Rep.  Phil.  Com.,  1902,  Part  II,  p.  762. 

2  Ibid.,  p.  763.  3  Ibid.,  p.  701.  4  Ibid.,  p.  701. 


284  THE  PHILIPPINE  CURRENCY  REFORM 

ernment's  loss  was  the  government  employees'  gain.  A 
clerk,  for  example,  whose  salary  was  $100  a  month  received 
for  it  Pfs.  200  when  the  official  rate  was  2  to  i,  and  he 
received  Pfs.  266  for  it  when  the  rate  was  2.66  to  i.  The 
prices  of  the  local  products  that  he  bought,  his  rent,  wages 
of  servants,  etc.,  did  not  advance  much  during  1902  in 
terms  of  local  currency.1  In  1903  and  1904  the  writer 
heard  many  Americans  in  the  employment  of  the  Phil- 
ippine Government  talk  of  the  "good  old  times  when  one 
got  2.66  Mexican  for  a  dollar  gold  and  Mexican  went  fur- 
ther than  it  does  now."  Unfortunately  there  exist  no 
price  index  numbers  for  the  Philippines  by  which  the 
extent  of  the  upward  movement  of  prices  at  this  time 
.can  be  judged.  Government  employees  at  the  time  they 
were  receiving  these  high  local  currency  rates  for  their 
gold  wages  failed  fully  to  appreciate  them,  because  the 
official  rate  at  which  their  wages  were  converted  was 
usually  lower  than  the  market  rate  —  since,  as  previously 
noted,  the  official  rates  being  fixed  for  considerable  periods 
of  time  lagged  behind  the  market  rates,  which  might  fluc- 
tuate daily.2  Later,  however,  when  the  official  rate  began 
to  decline,  as  the  price  of  silver  advanced,  the  complaints 
of  government  employees  became  louder  and  more  frequent. 
Since  the  Government  suffered  financially  during  the 
year  1902  and  the  fore  part  of  1903,  when  the  gold  value 


LOf  course  when  the  rate  was  2.66  the  purchasing  power  of  the  peso  over 
goods  imported  from  gold  standard  countries  was  considerably  lower  than 
when  the  rate  was  2.00. 

2  In  his  1902  Report  the  Auditor  for  the  Philippine  Islands  said :  "Salaries 
of  officers,  clerks,  and  employees  in  the  insular  service  were  necessarily  paid 
in  local  currency  at  the  ratio  at  which  the  money  was  appropriated.  This 
resulted  in  loss  to  the  recipients  of  this  currency,  which  was  not  equal  in  com- 
mercial value  to  the  United  States  currency  represented  by  the  obligation. 
This  was  more  especially  true  in  Manila  than  in  some  of  the  provinces, 
where  local  currency  continued  to  circulate  in  small  amounts  at  even  the 
old  rate  of  two  to  one.  .  .  .  Many  complaints,  both  written  and  oral,  were 
made  to  the  Auditor,  but  as  the  accounts  were  settled  according  to  law,  this 
office  was  without  further  jurisdiction  in  the  matter."  Ibid.,  p.  764. 


DEPRECIATING  SILVER  STANDARD 


of  silver  was  depreciating,  it  would  be  expected  that  the 
Government  would  have  profited  during  the  greater  part 
of  1903,  when  silver  was  appreciating  in  terms  of  gold  and 
the  Government's  official  rate  was  being  reduced  from  2.66 
to  2.30.  "It  is  a  poor  rule  that  doesn't  work  both  ways." 
By  that  criterion  this  was  a  poor  rule,  for  the  Government 
appears  not  to  have  gained  but  actually  to  have  lost  by  the 
rise  in  the  gold  value  of  the  peso.  In  the  language  of  Wall 
Street  the  Government  found  itself  again  on  the  wrong 
side  of  the  market.  How  it  happened  will  be  seen  from 
the  following  facts  gleaned  from  the  annual  report  of  the 
Philippine  Auditor  for  1903  : 1 

The  Government's  cash  balances  in  United  States  cur- 
rency and  in  local  currency,  at  the  beginning  of  each 
month  of  the  fiscal  year,  and  the  Government's  monthly 
customs  receipts  —  by  far  the  largest  item  of  revenue  — 
in  round  numbers,  were  as  follows : 2 


DATE 

CASH  BALANCE 

DEPOSITS  ON  ACCOUNT  OFJ 
CUSTOMS  REVENUES 

$ 

Pfs. 

$ 

Pfs. 

ooo 

ooo 

ooo 

000 

July,  1902 

1,257 

10,756 

229 

1,202 

Aug.,  1902 

1,516 

10,475 

385 

453 

Sept.,  1902 

2,190 

10,384 

405 

1,056 

Oct.,  1902 

2,591 

10,224 

297 

1,559 

Nov.,  1902 

2,979 

",450 

278 

i,i95 

Dec.,  1902 

2,940 

9,555 

288 

1,207 

Jan.,  1903 

3,265 

7,895 

562 

723 

Feb.,  1903 

3,792 

6,683 

479 

538 

Mar.,  1903 

4,320 

6,409 

642 

296 

Apr.,  1903 

4,621 

3,792 

621 

390 

May,  1903 

6,074 

2,430 

658 

215 

June,  1903 

8,726 

1,009 

584 

35i 

The  Treasurer's  cash  balance  at  the  end  of  the  fiscal 
year    1903    consisted    of    $10,853,803    in    United    States 

1  Ibid.,  1903,  in,  pp.  391  ff.  2  Ibid.,  pp.  399-405- 


286  THE  PHILIPPINE  CURRENCY  REFORM 

currency,  with  an  overdraft  in  Mexican  currency  of 
Pfs.  539,269,  which  had  been  temporarily  met  by  the 
Treasurer  from  other  funds  in  his  hands.1 

Three  striking  facts  stand  out  in  the  above  figures:  (i) 
The  Government  had  a  large  local  currency  balance  down 
to  November  1902,  in  which  month  it  reached  a  maximum 
of  approximately  eleven  and  a  half  million  pesos.  Begin- 
ning with  December  this  local  currency  balance  dwindled 
until  it  amounted  to  only  about  a  million  pesos  on  June 
i,  1903,  and  became  an  overdraft  of  over  a  half  million 
pesos  by  June  30.  (2)  Throughout  the  fiscal  year  ending 
June  30,  1903  there  was  an  increase  every  month,  except 
December,  in  the  Government's  United  States  currency 
balance,  rising  from  $1,257,000  for  July  i,  1902  to$io,854,ooo 
for  June  30,  1903,  but  this  increase  took  place  chiefly  dur- 
ing the  period  January  i,  1903  to  June  30,  1903,  during 
which  the  increase  amounted  to  approximately  $7,600,000. 
(3)  With  the  exception  of  the  month  of  August  1902  the 
customs  receipts  for  every  month  through  December  1902 
were  chiefly  in  local  currency;  after  December  for  every 
month  they  were  chiefly  in  United  States  currency,  the 
proportion  paid  in  this  currency  showing  a  tendency  to 
increase. 

A  glance  at  the  chart  on  page  251  will  show  that  the 
gold  value  of  the  local  peso  reached  its  low  points  in  De- 
cember 1902  and  January  1903.  The  lowest  telegraphic 
transfer  rate  ever  reached  in  Manila  was  the  iS^d.  rate 
reached  in  December  1902.  A  reference  to  the  table  of 
official  rates2  will  show  that  the  most  unfavorable  rates 
to  local  currency  ever  declared  were  the  three  covering 
the  period  November  23,  1902  to  April  2,  1903.  But 
these  were  the  rates  at  which  the  Government  disposed 
of  the  great  bulk  of  its  local  currency  balance  —  a  balance 
obtained  mostly  at  rates  representing  a  much  higher 
gold  value. 

1  Rep.  Phil.  Com.,  1903,  HE,  p.  391.  2  Supra,  p.  280. 


DEPRECIATING  SILVER  STANDARD  287 

When  the  gold  value  of  the  local  peso  was  falling,  we 
found  that  the  official  rate  lagged  behind  the  market  rate, 
representing  a  continual  overvaluation  of  local  currency 
in  terms  of  United  States  currency,  and  leading  to  the 
payment  of  government  taxes  and  dues  chiefly  in  local 
currency.  Now  during  the  period  of  the  rise  in  the  gold 
value  of  the  local  peso,  the  official  rate  likewise  lagged  be- 
hind the  market  rate,  with  the  result  that  local  currency 
was  continually  undervalued  by  the  Government  and 
taxes  were  paid  chiefly  in  United  States  currency  —  another 
illustration  of  Gresham's  law. 

According  to  the  Auditor  of  the  Philippine  Islands  the 
policy  of  depleting  the  Government's  local  currency  bal- 
ance was  a  deliberate  one.1  He  said: 

"The  Treasurer's  cash  balance  at  the  beginning  of  the 
fiscal  year,  three  fourths  in  Mexican  currency,  had  shifted 
to  a  balance  wholly  in  United  States  currency  at  its  close. 
This  was  the  result  of  a  policy  deliberately  adopted  of  under- 
valuing the  Mexican  currency  to  such  a  degree  in  fixing 
the  official  ratio  that  it  was  not  offered  to  any  consider- 
able extent  in  payment  of  public  dues,  United  States 
currency  being  paid  in  preference.  On  the  other  hand, 
almost  all  the  insular  appropriations,  except  those  for  the 
purchase  of  bullion,  were  withdrawn  and  disbursed  in 
Mexican  currency,  in  accordance  with  the  provisions  of  the 
appropriation  acts.  This  policy  of  taking  in  the  stable 
currency  and  paying  out  the  unstable  currency  paved  the 
way  to  the  adoption  of  the  gold  standard  at  the  close  of  the 
fiscal  year.  The  Government,  in  protecting  its  revenue 
collections  against  the  unstable  currency  by  undervaluing 
it,  was  compelled,  however,  to  pay  its  obligations  in  the 
same  undervalued  medium.  This  caused  a  loss  to  the 
Government  fully  as  great  as  that  which  found  expression 
in  the  accounts  of  the  previous  fiscal  year  " — a  loss  for  the 
fiscal  year  estimated  by  the  Secretary  of  Finance  and 
Justice  at  approximately  $659,ooo.2 

1  Ann.  Rep.  Phil.  Com.,  1903,  HI,  p.  391.  *  Ibid.,  p.  281. 


288  THE  PHILIPPINE  CURRENCY  REFORM 

Just  how  this  policy  of  paying  out  millions  of  pesos  of 
local  currency  at  rates  representing  a  loss  to  the  Govern- 
ment and  intentionally  fixed  below  the  current  market 
value  paved  the  way  for  the  adoption  of  the  gold  standard 
is  difficult  to  see.1  If  the  old  currency  was  to  be  with- 
drawn from  circulation  upon  the  introduction  of  the  new 
gold  standard  currency,  it  would  seem  more  natural  for 
the  Government  to  pave  the  way  by  overvaluing  the  old 
currency  so  as  to  accumulate  as  much  as  possible  either  for 
recoinage  or  for  exportation.  This  the  Government  later 
did.  Furthermore  it  would  presumably  be  much  easier 
to  substitute  the  proposed  new  gold  standard  coin  (rep- 
resenting 50  cents  of  American  money)  for  United  States 
currency  in  circulation  than  for  local  currency.  This  fact, 
obvious  in  the  light  of  Gresham's  law,  was  abundantly 
proved  by  subsequent  experience.2  A  continual  small 
overvaluation  of  local  currency  at  this  time,  when  the 
gold  price  of  silver  was  rising,  the  writer  believes,  would 
have  expedited  the  subsequent  currency  reform,  i.e.,  the 
transition  to  the  gold  standard,  and  incidentally  would 
have  proved  fiscally  profitable  to  the  Government,  off- 
setting in  a  degree  the  exchange  losses  incurred  by  the 
Government  during  1902  when  the  price  of  silver  was 
falling., 

Accounting  Difficulties.  The  second  governmental  dif- 
ficulty with  the  dual  standard  was  that  of  accounting, 
which  had  caused  so  much  trouble  during  the  period  of  the 
Military  Government.  The  civil  authorities  had  made 
vigorous  efforts  to  cope  with  this  problem  and  had  ac- 
complished something.  That  they  were  still,  however, 
far  from  a  satisfactory  solution  of  it  is  evidenced  by  the 
Auditor's  official  reports.  The  two  most  serious  difficulties, 
confusion  and  temptation  to  fraud,  may  best  be  described 

1  It  may  have  encouraged  somewhat  the  commercial  exportation  of  that 
part  of  the  local  currency  consisting  of  Mexican  pesos. 

2  Cf.  infra,  pp.  327-32. 


DEPRECIATING  SILVER  STANDARD  289 

in  the  language  of  the  Auditor  and  of  the  Secretary  of 
Finance  and  Justice.  As  to  the  former  difficulty  the 
Auditor  said  in  his  annual  report  for  1902: 

"At  one  time 'disbursing  officers  were  handling  two  kinds 
of  currency  involving,  in  effect,  five  standards  of  value. 
They  were  expending  appropriations  disbursable  in  United 
States  currency;  appropriations  disbursable  in  local  cur- 
rency at  the  ratio  of  two  to  one;  half  and  half  appro- 
priations, or  appropriations  disbursable  one  half  in  United 
States  currency  and  one  half  in  local  currency  at  the  ratio 
of  two  to  one;  local  currency  appropriations  disbursable 
at  [Pfs.]  2.10  to  $i ;  and  appropriations  disbursable  in  local 
currency  at  [Pfs.]  2.27  to  $i.  The  difficulties  arising  under 
such  a  complicated  system  were  almost  insuperable,  es- 
pecially as  all  accounts  were  required  to  be  stated  to  the 
War  Department  expressed  in  United  States  currency. 
The  debit  and  credit  differences  to  be  adjusted  were  so 
numerous  as  greatly  to  impede  the  progress  of  the  ac- 
counting work."1 

In  this  connection  it  should  be  added  that  it  took  con- 
siderable time  to  communicate  changes  in  the  official  rate 
to  places  distant  from  Manila,  often  several  weeks  for  the 
remoter  parts  of  the  Islands.  There  were  towns  in  the 
Philippines  as  far  distant  from  Manila  as  New  York  City 
if  the  distance  be  measured  by  the  time  required  for  a  letter 
to  reach  them.  The  result  was  that  in  these  remote  places 
receiving  and  disbursing  officers  operated  on  a  false  basis 
for  a  considerable  time,  and  met  with  much  trouble  in  set- 
tling their  accounts  with  the  Auditor.  This  was  particu- 
larly true  when  frequent  changes  in  the  official  rate  were 
made. 

As  to  the  temptation  to  fraud,  which  all  too  often  in  the 
Philippines  proved  too  strong  for  men  who  had  proven 
excellent  volunteer  soldiers  and  who  were  later  appointed 
to  responsible  financial  positions  under  the  Civil  Govern- 

1  Phil.  Com.  Rep.,  1902,  II,  pp.  763-64. 


290  THE  PHILIPPINE  CURRENCY  REFORM 

ment,1  the  Secretary  of  Finance  and  Justice  said  in  his 
1903  annual  report: 

"There  is  a  great  opportunity  on  the  part  of  all  receiving 
and  disbursing  officers  for  fraud  of  such  a  character  as  to 
be  almost  impossible  to  discover.  At  nearly  all  times  it 
is  more  profitable  to  pay  in  one  currency  .  .  .  than  in  the 
other,  because  a  receiving  officer  who  receives  payment  in 
United  States  money,  when  that  money  is  more  valuable 
than  local  currency  at  the  official  ratio,  can  sell  the  money 
of  the  United  States  and  receive  local  currency  in  exchange 
therefore  at  the  commercial  rate,  and  pocket  the  difference 
between  the  commercial  ratio  and  the  official  ratio,  making 
the  entries  upon  his  books  to  appear  that  he  received  pay- 
ments in  local  currency ;  and  the  same  thing  applies  to  all 
disbursing  officers.  If,  on  the  other  hand,  it  is  more  profit- 
able to  make  payment  in  gold,  local  currency  can  be  readily 
exchanged  with  money  changers  for  gold,  or  for  money  of  the 
United  States,  the  difference  in  that  event  being  provided 
for  by  the  receiving  or  disbursing  officer  making  entries  to 
correspond  with  the  financial  transactions  instead  of  the 
actual  receipt  of  disbursement."2 

So  much  for  the  Government's  difficulties  with  the 
dual  standard ;  and  it  may  be  said  that  these  difficulties 
more  than  those  of  merchants  and  bankers  which  we  shall 
now  consider  gave  rise  to  the  demand  for  a  gold  standard. 

Difficulties  in  Connection  with  Foreign  Trade 

The  difficulties  experienced  by  merchants  centered 
chiefly  in  foreign  trade,  by  far  the  larger  part  of  which, 
both  export  and  import,  was  with  gold  standard  countries. 
Exchange  with  silver  standard  countries  like  China  and  the 
Straits  Settlements  was  fairly  constant,  varying  only  be- 
tween the  "silver  points."  The  following  brief  summary  3 

1  Cf.  Phil.  Com.  Rep.,  1903,  III,  pp.  393-97.  2  Ibid.,  pp.  701-02. 

'Figures  were  compiled  from  The  Commerical  Philippines  in  1906. 
Published  by  the  U.  S.  Department  of  Commerce  and  Labor,  Jan.  1907, 
pp.  33  and  34. 


DEPRECIATING  SILVER  STANDARD 


291 


for  the  years  1900  to  1903  inclusive  will  give  a  picture  of 
the  situation.     The  figures  are  in  millions  of  dollars. 

EXPORTS 


X 

2 

3 

4 

5 

6 

YEAR 

United 
States 

United 
Kingdom 

Certain  Other 
European 
Countries  l 

Hongkong 
and  China 

Other 
^Countries 

Total 

1900 

$  2.96 

$  8.10 

$4.23 

$4.II 

$3-59 

$22.99 

IOOI 

4-55 

11.13 

2.67 

3-04 

3-12 

24.50 

IQO2 

11.48 

8.02 

3-16 

3-68 

2-34 

28.67 

1903 

I3-07 

9.46 

4.26 

2.29 

3-3° 

32.40 

IMPORTS 


i 

2 

3 

4 

5 

6 

7 

8 

YEAR 

United 
States 

United 
Kingdom 

Certain 
Other 
European 
Countries2 

Hong- 
kong 
and 
China 

British 
East 
Indies 

French 
East 
Indies 

Other 
Countries 

Total 

1900 

$2.IS 

$5-58 

$4.60 

$7-74 

$1.74 

$0.76 

$2.29 

$24.86 

1901 

3-53 

5.69 

6.05 

5-05 

3.38 

2.36 

4.09 

30.16 

1902 

4-15 

5-64 

6.38 

6.47 

1.67 

5-57 

3-45 

33-34 

1903 

3-84 

4.62 

5-10 

5-14 

2.72 

8.17 

4-23 

33-81 

All  the  exports  referred  to  in  the  above  table  were  to 
gold  standard  countries  except  those  to  Hongkong  and 
China  (column  4)  and  a  small  part  of  those  to  "other 
countries"  (column  5).3  It  is  a  fair  conclusion  that  not 

1  These  countries  in  the  order  of  their  importance  for  the  export  trade 
were  France,  Spain,  Germany. 

2  These  countries  in  the  order  of  their  importance  for  the  import  trade 
were  Spain,  Germany,  France. 

3  The  exports  to  the  Straits  Settlements  are  included  in  column  5.    Their 
amount  normally  ran  in  the  neighborhood  of  $600,000  to  $800,000  annually. 
The  silver  standard  countries  of  Siam,  French  Indo  China,  and  Mexico  were 


292  THE  PHILIPPINE  CURRENCY  REFORM 

over  one  seventh  of  the  Philippine  export  trade  at  the 
time  could  properly  be  assigned  to  silver  standard  countries, 
and  that  the  proportion  was  declining. 

When  we  turn  to  the  import  trade  we  find  that  the 
silver  standard  countries  were  playing  a  much  more  im- 
portant role.  The  imports  from  silver  standard  countries 
came  mostly  from  Hongkong  and  China  and  from  the 
French  East  Indies.  Those  from  the  French  East  Indies 
(column  6)  represented  chiefly  rice  imported  from  Saigon, 
the  Philippine  rice  crops  during  the  years  1902  to  1905 
having  been  particularly  bad.  Imports  from  silver  stand- 
ard countries  represented  something  like  a  third  to  two 
fifths  of  the  total  imports,  and  the  proportion  seemed  to  be 
increasing.  As  an  argument  for  the  continuance  of  the 
silver  standard,  however,  these  figures  were  weakened  by 
the  facts  that  the  heavy  rice  importations  from  Saigon  were 
looked  upon  as  merely  temporary,  and  that  French  Indo 
China  itself  was  soon  to  give  up  the  silver  standard  for 
the  gold  standard. 

Clearly  the  logic  of  the  foreign  trade  situation  strongly 
favored  the  gold  standard  for  the  Philippines.  In  saying 
this,  however,  it  is  not  intended  to  subscribe  to  the  ex- 
travagant ideas  of  the  evils  to  foreign  trade  of  "an  unstable 
and  fluctuating  dollar"  which  were  so  widely  entertained  at 
the  time  by  Americans  in  the  Philippines  and  of  which  the 
Government  reports  contained  so  many  examples. 

Exchange  Fluctuations  and  Foreign  Trade.  The  character 
of  the  evil  as  it  was  popularly  understood  and  the  evil 
as  it  actually  existed  may  be  shown  by  a  few  hypothetical 
illustrations  reducing  the  problem  to  its  simplest  terms. 

Let  us  suppose  that  on  January  i  a  hemp  dealer  in  the 
Philippines  contracts  to  deliver  a  given  quantity  of  hemp 
in  New  York  by  the  fore  part  of  April,  at  a  total  price  of 

also  included  among  "other  countries."  To  these  silver  standard  countries, 
all  three  of  which  were  soon  to  adopt  the  gold  standard,  the  Philippine  ex- 
ports were  very  small. 


DEPRECIATING  SILVER  STANDARD  293 

$10,000  payable  in  New  York  City.  Suppose  that  the 
hemp  dealer  arranges  to  draw  upon  the  consignee  a  de- 
mand bill  for  $10,000,*  to  be  forwarded  so  as  to  arrive  in 
New  York  at  about  the  time  of  the  arrival  of  the  hemp. 
Suppose  also  that  at  the  time  these  arrangements  are  being 
made,  the  Manila  banks'  buying  price  for  such  demand 
bills  is  40,  i.e.,  they  will  give  Pfs.  i.oo  for  each  $0.40  of 
the  bill.  At  this  rate  the  exporter  would  receive  for  his 
hemp  bill  Pfs.  25,000.  Assume  that  he  knows  at  about 
what  price  he  can  buy  the  hemp  in  the  Philippines  and  that 
he  calculates  that  he  can  buy  it  and  deliver  it  in  New  York 
at  a  total  cost  of  Pfs.  23,000.  This  would  leave  him  a 
net  profit  of  Pfs.  2000.  Accordingly  he  buys  the  hemp,  as 
planned,  during  January  and  February,  obtaining  the 
funds  by  means  of  an  overdraft  on  his  Manila  bank  secured 
by  a  pledge  of  the  hemp  as  purchased.  He  ships  it  the 
first  of  March,  drawing  at  the  same  time  a  sight  bill  on  the 
consignee  for  $10,000  and  offers  to  sell  this  bill  to  his 
Manila  bank.  Meanwhile,  however,  let  us  assume  the 
price  of  silver  has  risen  and  with  it  New  York  exchange,  so 
that  the  rate  for  such  demand  bills  is  now  45  instead  of  the 
40  upon  which  the  merchant  had  based  his  calculations. 
Being  compelled  to  sell  at  45,  i.e.,  to  take  a  peso  for  each 
45  cents  of  United  States  money  coming  to  him  instead  of 
for  each  40  cents,  he  obtains  for  his  bill  of  $10,000  only 
Pfs.  22,222  instead  of  Pfs.  25,000.  Thus  his  estimated 
profit  of  Pfs.  2000  is  changed  into  a  loss  of  Pfs.  778,  and 
this,  despite  the  fact  that  he  bought  the  hemp  at  the  cal- 
culated price  and  had  definitely  contracted  for  its  sale  be- 
fore its  purchase. 

If  in  the  interim  exchange  had  fallen  to  35  instead  of 
rising  to  45,  he  would  have  received  Pfs.  28,575  for  his 
$10,000  bill  and  his  profit  would  have  been  increased  from 

1  In  practice  such  a  transaction  would  usually  have  been  financed  through 
a  sterling  letter  of  credit  opened  in  London  by  the  consignee  through  his 
New  York  bank. 


294  THE  PHILIPPINE   CURRENCY  REFORM 

Pfs.  2000  to  Pfs.  5575.  The  hemp  exporter  would  thus 
gain  by  a  fall  in  exchange  and  lose  by  a  rise ;  but  he  would 
run  a  great  risk,  and  such  risk-taking  as  this  is  not  his 
business. 

Let  us  take  a  similar  hypothetical  illustration  from  the 
side  of  the  importer.  A  Manila  wholesale  shoe  merchant 
buys  by  cable  order,  on  January  ist,  5000  pairs  of  shoes  in 
America  at  $2.00  a  pair,  when  exchange  is  at  40.  The 
shoes  are  to  be  delivered  in  Manila  in  60  days,  and  the 
merchant  is  to  pay  for  them  by  cable  in  New  York  funds 
30  days  after  their  delivery.  The  local  market  for  shoes 
of  this  kind,  let  us  assume,  is  such  that  the  merchant  can 
sell  them  at  Pfs.  6.00  a  pair,  which  would  yield  him  a  gross 
profit  of  a  peso  per  pair  or  a  total  of  Pfs.  5000.  Allowing 
Pfs.  2000  for  expenses,  he  would  have  a  net  profit  on  the 
transaction  of  Pfs.  3000  (which  would  be  equivalent  with 
exchange  at  40  to  $1200).  He  closes  his  contracts  on  both 
sides,  that  is,  he  buys  the  5000  pairs  of  shoes  at  $2.00  a 
pair  and  agrees  to  deliver  them  to  Philippine  retailers  at 
Pfs.  6.00  a  pair.  But  during  the  next  three  months,  let 
us  assume,  there  is  a  substantial  drop  in  the  price  of  silver 
and  with  it  of  New  York  exchange,  the  price  of  cables  fall- 
ing from  40  to  35.  The  merchant  has  realized  Pfs.  30,000  for 
the  shoes,  and  he  now  goes  to  his  Manila  bank  to  purchase 
his  cable  transfer  on  New  York  in  favor  of  the  shoe  manu- 
facturer for  $10,000.  At  an  exchange  rate  of  35,  however, 
this  sum  costs  him  Pfs.  28,575  instead  of  the  Pfs.  25,000 
which  he  had  counted  upon  in  figuring  exchange  at  the 
earlier  rate  of  40.  When  he  adds  to  this  the  Pfs.  2000  for 
expenses  he  finds  that  his  anticipated  net  profit  of  Pfs. 
3000  has  been  transformed  into  an  actual  net  loss  of  Pfs. 

575- 

Even  had  he  not  contracted  in  advance  for  the  sale  of 
the  shoes  in  Manila  for  Pfs  6.00  a  pair  he  would  probably 
have  suffered,  because  the  mere  fact  of  a  drop  in  exchange 
does  not  make  it  possible  to  sell  the  shoes  at  a  higher  price. 


DEPRECIATING  SILVER  STANDARD  295 

The  local  currency  wages  and  incomes  of  most  persons  who 
buy  shoes  have  not  been  appreciably  affected  by  this 
sudden  drop  in  exchange,  nor  is  their  demand  for  shoes 
thereby  increased.  In  the  course  of  time  such  a  decline  in 
exchange,  if  it  were  permanent,  would  influence  the  supply 
of  shoes  on  the  market  through  lessening  their  importation 
and  thereby  tend  to  raise  the  local  currency  price.  But  at 
best  this  influence  works  slowly  —  often  too  slowly  to  be 
of  much  benefit  to  the  merchant  who  has  already  imported 
a  large  stock  —  for  of  imported  goods  like  shoes  there  is 
usually  a  considerable  supply  on  hand.  Then,  too,  there 
is  often  the  alternative  of  importing  from  silver  standard 
countries  with  which  exchange  has  remained  practically 
constant.  One  must  not  assume,  as  Americans  thinking 
in  terms  of  United  States  currency  so  commonly  did,  that 
the  price  of  shoes  would  rise  promptly  and  just  in  proportion 
to  the  fall  in  exchange.  The  responsiveness  of  prices,  even 
of  goods  imported  from  gold  standard  countries,  was 
usually  slow  and  incomplete.  Retail  and  wholesale  prices 
cannot  fluctuate  with  daily  or  even  weekly  or  monthly 
movements  of  exchange  —  and  that  is  particularly  true  in 
an  oriental  and  tropical  country  like  the  Philippines  where 
inertia  and  custom  play  such  important  r61es. 

If  in  the  above  illustration  exchange  had  risen  to  45  in- 
stead of  falling  to  35,  the  importer  would  have  been  able 
to  buy  his  $10,000  cable  transfer  to  New  York  for  only 
Pfs.  22,222,  thereby  raising  his  anticipated  net  profit  from 
Pfs.  3000  to  Pfs.  5278  —  an  increase  in  the  net  profit  as 
measured  in  United  States  currency  from  an  anticipated 
$1200  to  an  actual  $2375. 

Obviously  the  rise  in  exchange  which  was  so  harmful  to 
the  exporter  was  pro  tanto  favorable  to  the  importer; 
while  the  fall  in  exchange  which  was  so  favorable  to  the 
exporter  was  pro  tanto  harmful  to  the  importer.  A  falling 
exchange  stimulated  exportation  and  inhibited  importa- 
tion; a  rising  exchange  stimulated  importation  and  in- 


296  THE  PHILIPPINE   CURRENCY  REFORM 

hibited  exportation.  Either  called  for  an  adjustment  in 
currency  shipments,  and  either  tended  toward  a  one-sided 
and  artificial  stimulus  to  trade  which  was  not  in  the  interest 
of  healthy  trade  development.1 

Forward  Exchange  Contracts.  The  above  illustrations, 
although  representing  a  common  interpretation  of  the  handi- 
caps under  which  Philippine  foreign  trade  was  conducted 
during  the  period  of  the  silver  standard,  greatly  exaggerate 
those  handicaps.  As  a  matter  of  fact  the  exporter  of  hemp, 
unless  he  deliberately  planned  to  speculate  in  exchange, 
would  have  gone  to  his  bank  at  about  the  time  that  he 
contracted  with  the  New  York  merchant  for  the  sale  of 
his  hemp  and  would  have  made  a  contract  for  the  for- 
ward sale  of  his  hemp  bill  at  a  definite  price.  He  would 
have  agreed  in  January  to  sell  his  hemp  to  the  New  York 
merchant  at  so  many  dollars  per  bale,  and  at  the  same 
time  would  have  agreed  with  his  Manila  bank  to  sell 
the  dollars  he  was  to  receive  in  New  York,  i.e.,  his  New 
York  bill  of  exchange,  at  a  definite  price  in  local  cur- 
rency, say,  at  a  rate  of  a  peso  for  each  $0.41.  Then, 
no  matter  what  happened  to  exchange,  he  would  have 
been  safe.  If  exchange  rose  to  45,  he  would  not  have  suf- 
fered —  that  would  have  been  the  bank's  affair,  not  his. 
If  it  fell  to  35,  he  would  not  have  profited.  He  is  not  a 
speculator  in  silver,  but  a  dealer  in  hemp,  and  he  would 
have  shifted  this  speculative  risk  to  the  shoulders  of  those 
whose  business  it  is  to  handle  such  risks.  A  similar  policy 
would  have  been  followed  by  the  importer  of  shoes.  When 
in  January  he  made  his  contract  to  buy  the  shoes  in  New 

1  Cf .  The  Influence  of  Falling  Exchange  upon  the  Returns  Received  for 
National  Products.  Argument  submitted  to  the  Monetary  Commission  of 
the  Republic  of  Mexico,  April  18,  1903,  by  Charles  A.  Conant,  Jeremiah  W. 
Jenks,  and  Edward  Brush.  Printed  in  Report  of  Commission  on  Interna- 
tional Exchange,  1903,  pp.  431-39.  Cf.  also  Jeremiah  W.  Jenks,  Currency 
Problems  in  the  Orient.  Papers  and  Proceedings  of  the  Fifteenth  Annual 
Meeting  of  the  American  Economic  Association,  December  1902,  pp.  272- 
76. 


DEPRECIATING  SILVER  STANDARD  297 

York  for  $10,000  he  would  have  made  a  forward  contract 
with  the  bank  for  the  purchase  of  these  $10,000  to  be  laid 
down  in  New  York,  say  90  days  hence,  when  payment  for 
the  shoes  should  fall  due,  at  the  exchange  rate  of  39,  let  us 
say.  If  in  the  interim  exchange  fell  to  35,  he  would  not 
thereby  have  lost,  and  if  it  rose  to  45,  he  would  not  have 
gained.  The  price  at  which  he  was  to  buy  his  New  York 
dollars  would  have  been  fixed,  and  the  risk  of  loss  or  chance 
of  profit  arising  from  exchange  fluctuations  would  have  been 
shifted  to  the  bank. 

The  bank  itself,  however,  in  making  these  two  forward 
contracts,  one  for  the  delivery  by  the  bank  three  months 
hence  of  a  cable  transfer  of  $10,000  to  New  York,  and  one 
for  the  delivery  to  the  bank  in  Manila  of  a  demand  bill 
which  would  be  paid  in  New  York  three  months  hence, 
would  also  have  avoided  the  risk  arising  from  exchange 
fluctuations.  It  would  have  hedged.  The  $10,000  bought 
from  the  exporter  at  the  rate  of  a  peso  for  each  41  cents  it 
would  have  sold  to  the  importer  at  the  rate  of  39  cents  for 
each  peso.  The  profit  to  the  bank  would  have  consisted  in 
the  difference  between  the  buying  rate  and  the  selling  rate 
—  here  for  simplicity  of  illustration  assumed  to  be  much 
larger  than  would  normally  have  been  the  case. 

It  should  be  repeated  that  the  transactions  were  generally 
nothing  like  so  simple  in  practice  as  in  the  above  hypothet- 
ical illustrations.  Most  of  this  exchange  business  was 
done  through  London  and  comparatively  little  directly 
with  New  York.  Sterling  exchange  dominated  the  mar- 
ket. Exports,  moreover,  were  financed  largely  by  time 
bills,  which  were  later  discounted  in  London,  not  by  de- 
mand bills.  The  banks  did  not  " cover"  each  day  their 
forward  contracts  for  the  purchase  of  exchange  with  for- 
ward contracts  in  like  amount  for  its  sale.  Each  bank 
studied  its  own  situation  and  made  its  forward  contracts 
according  to  its  own  circumstances  and  its  anticipation  of 
the  future  silver  and  exchange  market.  If  the  bank  was 


298  THE  PHILIPPINE  CURRENCY  REFORM 

conservative,  it  kept  both  sides  of  the  account  about  equal, 
that  is,  it  covered  all  of  its  forward  contracts  with  reason- 
able promptness.  On  the  other  hand,  if  it  was  willing  to 
speculate  —  and  oriental  banks  generally  did  speculate  in 
exchange  —  it  oversold  sterling  when  it  expected  silver  to 
rise,  thereby  expecting  to  receive  its  pay  in  an  appreciating 
local  peso;  and  it  overbought  sterling  when  it  expected 
silver  to  fall,  thereby  expecting  to  pay  for  its  sterling  in  a 
depreciating  local  peso. 

Bank  facilities  of  this  kind  for  the  avoidance  of  the  risks 
of  exchange  fluctuations  were  available  to  all  importers  and 
exporters  of  financial  standing,  and  through  them  the  evils 
commonly  attributed  to  the  fluctuating  exchange  were 
greatly  mitigated.  On  the  other  hand,  it  should  be  said 
that  the  Philippine  exchange  banks  were  accustomed  to 
dealing  in  large  figures  and  had  little  concern  for  the  small 
merchants,  many  of  whom  were  not  in  a  favorable  position 
to  protect  themselves  by  forward  contracts.  Further- 
more, as  long  as  a  fluctuating  exchange  existed,  there  were 
sure  to  be  some  traders  who  preferred  to  gamble  on  the 
price  of  silver  rather  than  to  shift  the  exchange  risk  through 
forward  contracts.  The  banks'  charges,  moreover,  for  the 
facilities  they  offered  were  often  high,  and  involved  a  real 
expense  to  trade. 

Attitude  of  Different  Classes  toward  Proposals  for  a  Gold 

Standard 

The  above  discussion  of  the  foreign  trade  situation  will 
go  far  toward  explaining  the  attitude  of  different  classes  in 
the  community  toward  proposals  for  the  adoption  of  a 
gold  standard.  Chinese  exporters,  who  were  dealing  mostly 
with  China,  naturally  favored  a  continuation  of  the  silver 
standard ;  so  likewise  did  the  large  European  export  houses, 
mostly  English,  Spanish,  German,  and  French,  who  were 
reaping  extra  profits  by  the  downward  movement  of  ex- 


DEPRECIATING  SILVER  STANDARD  299 

change,  since  they  were  receiving  continually  more  local 
pesos  for  their  gold  bills,  and  did  not  have  to  pay  propor- 
tionately more  pesos  for  their  hemp,  tobacco,  sugar,  and 
copra.  The  bankers  likewise  were  nearly  all  favorable  to 
a  continuation  of  the  silver  standard.  They  were  reaping 
large  profits  from  foreign  exchange  fluctuations,  and  from 
the  exchange  in  the  Philippines  of  local  currency  for  United 
States  currency  and  vice  versa.  The  great  masses  of 
Filipinos  rarely  came  into  contact  with  gold  prices  and  knew 
nothing  about  the  currency  situation.  They  sold  local 
produce  and  they  bought  local  produce,  for  the  most  part 
at  fairly  constant  and  customary  prices.  They  had  no 
knowledge  of  the  "unstable  and  fluctuating  currency" 
about  which  the  American  officials  and  the  American 
newspapers  were  talking  so  much.  The  American  and 
European  importing  houses,  on  the  other  hand,  were  suf- 
fering from  a  continually  falling  exchange  —  they  bought 
at  comparatively  constant  gold  prices  abroad  and  found 
difficulty  in  exacting  for  their  importations  higher  local 
currency  prices  in  the  Philippines.  While  exchange  was 
falling  it  was  taking  a  continually  increasing  number  of 
local  pesos  to  buy  a  pound,  a  dollar,  or  a  franc's  worth  of 
supplies  abroad.  The  American  merchants  who  had  come 
to  the  Philippines  to  cater  to  the  American  trade  were 
much  more  largely  interested  in  the  import  trade  than  in 
the  export  trade.  These  merchants,  together  with  Ameri- 
can government  clerks,  officials,  school  teachers,  and  sol- 
diers, were  the  ones  whose  opinions  were  expressed  in  the 
American  newspapers  in  the  Philippines,  in  the  letters 
that  were  sent  to  America,  and  in  the  official  reports  of 
government  officers.  The  writer  believes  that  the  evidence 
already  cited  made  strongly  in  favor  of  the  introduction  of 
a  gold  standard  in  the  Philippines ;  he  is  equally  convinced, 
however,  that  neither  the  need  nor  the  demand  was  as 
urgent  as  the  reports  that  reached  America  made  out. 


CHAPTER  IV 

PROPOSALS  FOR  PERMANENT  CURRENCY  REFORM 

BROADLY  speaking,  there  developed  early  three  proposals 
for  currency  reform,  each  of  which  had  its  advocates  both 
in  the  Philippines  and  in  the  United  States,  and  each  of 
which  at  one  time  or  another  passed  at  least  one  house  of 
the  United  States  Congress.  They  were :  (i)  to  continue 
the  silver  standard,  recoining  the  existing  Mexican  and 
Spanish-Filipino  coins  into  distinctively  American  coins 
bearing  the  insignia  of  the  United  States ;  (2)  to  introduce 
the  United  States  currency  system  as  rapidly  as  possible ; 
(3)  to  adopt  a  gold  standard  with  a  new  coinage,  the  unit 
to  be  a  peso  equivalent  in  value  to  fifty  cents  of  United 
States  money. 

Silver  Standard  with  a  New  Coinage 

The  first  plan,  as  has  been  intimated,  was  favored  by  the 
leading  export  merchants,  and  also  by  a  great  majority  of 
those  connected  with  banking  in  the  Philippines.  To  most 
of  these  persons  it  was  clear  that  the  existing  silver  stand- 
ard coins  —  varying  in  weight  and  fineness  even  among 
coins  of  the  same  denomination,  of  unequal  and  often  in- 
ferior workmanship,  and  bearing  the  insignia  of  the  sov- 
ereignty of  Spain  and  Mexico  —  must  go.  The  solution 
proposed  was  to  recoin  this  money  into  American  silver 
standard  coins,  the  unit  to  be  a  coin  similar  to  the  British 
dollar  which  had  been  coined  by  England  in  Bombay  since 
1894  for  circulation  in  the  Orient.  The  new  coins  would  be 

3oo 


PROPOSALS  FOR  PERMANENT  CURRENCY  REFORM    301 

similar  in  size  to  the  Mexican  peso,  with  which  the  people 
were  familiar,  and  the  silver  standard  to  which  the  Islands' 
trade  was  adjusted  would  be  continued.  There  would  be 
little  disturbance  to  business,  and  the  Philippines  would 
have  a  simple  and  automatically  operating  currency  in 
harmony  with  the  currencies  of  the  neighboring  countries 
of  China  and  the  Straits  Settlements.  The  coinage,  more- 
over, would  be  brought  under  American  control,  since  the 
coins  would  be  no  longer  minted  in  Mexico,  but  either  in 
Manila  or  at  the  mints  of  the  United  States.1 

Against  this  plan  the  arguments  already  cited  against 
the  silver  standard  were  urged,  and,  since  it  was  unani- 
mously opposed  by  the  members  of  the  Philippine  Com- 
mission, and  by  a  large  majority  in  the  United  States  House 
of  Representatives,  it  never  had  much  prospect  of  adop- 
tion, although,  as  will  be  seen  later,2  it  was  unanimously 
adopted  by  the  United  States  Senate  in  1902. 

Extending  United  States  Currency  System  to  Philippines 

The  second  plan,  that  of  extending  the  United  States 
currency  system  to  the  Philippines,  as  it  had  been  extended 
to  Hawaii  and  Porto  Rico,3  requires  more  careful  atten- 
tion. To  most  Americans  it  was  the  obvious  solution  of 
the  problem.4  This  plan  was  adopted  by  the  House  of 

1  Such  a  plan  had  been  repeatedly  suggested  during  the  days  of  the  Mili- 
tary Government.     See,  for  example,  Edward  W.  Harden,  Report  on  the 
Financial  and  Industrial  Conditions  of  the  Philippine  Islands,  p.  10;   and 
Edwards,  Curr.  and  Exch.  Phil.,  pp.  50,  52,  54,  58-60,  62-63. 

2  Infra,  p.  309. 

3  Supra,  pp.  199-202. 

4  Representative  James  A.  Tawney  of  Minnesota  said  in  the  House  of 
Representatives:  "When  providing  a  system  of  coinage  for  the  Philippine 
Islands  was  first  presented  to  the  Committee  on  Insular  Affairs,  I  believe  I 
am  safe  in  saying  that  every  Republican  member  of  that  Committee,  like 
some  of  the  Republican  members  of  the  House,  favored  the  introducing  in 
the  Philippine  Archipelago,  not  only  the  American  system  of  coinage,  but 
our  denominations  and  nomenclature.  .  .  .    But  the  more  we  investigated 
the  question,  the  more  testimony  we  received,  and  the  more  we  heard  from 


302  THE  PHILIPPINE  CURRENCY  REFORM 

Representatives  In  January  1903,  but  was  rejected  by  the 
Senate  and  later  given  up  by  the  House.1 

Arguments  in  Favor  of  United  States  Currency  System. 
The  chief  arguments  urged  in  favor  of  the  plan  were  the 
following : 

(1)  It  was  the  simplest  gold  standard  plan  to  introduce. 
It  would  be  inexpensive  because  it  would  require  no  new 
coinage ;   it  would  be  safe  because,  unlike  the  other  plans, 
it  would  require  no  experiments  in  new  currency  devices. 
The  people  in  the  chief  cities  and  towns  were  already 
familiar  with  American  money  and  this  money  was  working 
its  way  into  wider  use  daily.     Representative  James  R. 
Williams  of  Illinois  said  in  the  House:    "So  long  as  we 
retain  those  Islands,  so  long  as  they  are  occupied  by  the 
American  Government,  and  I  may  say  by  the  American 
people,  a  large  amount  of  American  money  will  be  in 
circulation  there,  and  I  believe  it  will  be  better,  not  only 
for  the  Americans  there,  but  natives  as  well,   that  they 
should  have  but  one  system  of  currency.    A  double  sys- 
tem can  but  lead  to  confusion."2 

(2)  It  would  be  favorable  to  closer  trade  relations  with 
the  United  States.     Philippine  quotations  and  price  lists 
would  be  more  readily  understood  in  the  United  States, 
and  those  of  the  United  States  in  the  Philippines.     "To  put 
a  new  and  strange  system  of  coinage  in  the  Philippine  Is- 
lands," said  Representative  Charles  N.  Fowler  of  New 
Jersey  in  the  House  of  Representatives,  is  practically  to 
build  "a  fence  between  the  trade  of  those  Islands  and  the 
trade  of  ...  [the  Pacific  Coast]  which  will  always  prevail." 3 

(3)  The  third  argument  was  of  a  type  familiar  to  all 
readers  of  Congressional  debates.    If  introduced  into  the 

the  witnesses  with  respect  to  industrial,  financial,  and  commercial  conditions 
in  the  Philippine  Islands,  the  more  we  were  convinced  that  to  introduce  our 
American  system  of  coinage  in  toto,  including  denomination  and  nomen- 
clature, would  create  more  distress  industrially  than  exists  there  to-day." 
Cong.  Rec.,  57th  Cong.,  2d  Sess.,  p.  1081. 

1  See  infra,  pp.  312-13.  2Ibid.,  p.  1047.  3Ibid.,  p.  1073. 


PROPOSALS  FOR  PERMANENT  CURRENCY  REFORM    303 

Philippines  the  American  currency  system  would  "teach 
.  .  .  [the  Filipino]  the  lessons  of  the  flag  and  impress  upon 
him  the  power  and  glory  of  the  Republic."  1 

Arguments  against  United  States  Currency  System.  The 
chief  arguments  urged  against  the  introduction  of  United 
States  currency  were  the  following : 

(i)  Prices,  wages,  and  contracts  were  adjusted  to  the 
Mexican  peso  unit.  People  thought  in  terms  of  that 
unit.  Most  of  the  money  in  circulation  in  the  Philippines 
consisted  of  silver  coins ;  and  if  United  States  money  were 
introduced  as  the  sole  money  of  the  Islands,  a  large  part  of 
that  needed  would  be  in  the  form  of  silver.  To  substitute 
for  the  Mexican  peso  a  unit  of  twice  its  gold  value  but  rep- 
resented by  a  coin  containing  actually  less  silver  than  the 
Mexican  peso  would  be  confusing  to  the  masses  of  the 
people.  They  would  demand  the  same  prices  and  wages 
in  terms  of  the  United  States  dollar  that  they  had  been 
receiving  in  the  local  pesos.  In  time,  of  course,  the  ad- 
justment to  the  new  basis  would  be  effected,  but  while  it 
was  taking  place  it  would  lead  to  frequent  exploitation  of 
the  ignorant,  to  much  bickering,  and  to  criticism  and 
suspicion  of  the  American  authorities.  The  unfortunate 
experiences  of  Porto  Rico  during  the  period  of  transition 
from  the  Porto  Rican  currency  to  United  States  currency 
were  several  times  cited.2  Urging  this  argument  concern- 
ing the  disturbance  to  prices  and  wages,  Governor  Taft 
said  before  the  House  Committee  on  Insular  Affairs : 

"We  were  exceedingly  anxious  not  to  disturb  the  coinage 
as  it  now  exists  in  the  Islands  among  the  Filipinos.  I  mean 
.  .  .  that  we  were  exceedingly  anxious  not  to  disturb  the 
values  of  Oriental  peoples ;  and  the  Filipinos  who  do  not 
differ  from  other  Oriental  peoples  in  that  respect,  have  a 
great  regard  for  tradition  and  names;"  and  again,  "I  am 
very  certain  that  to  attempt  to  adopt  as  a  whole  the  coinage 

1  Ibid.,  p.  1070. 

2  For  an  account  of  this  experience  see  supra,  pp.  212-24. 


304  THE  PHILIPPINE  CURRENCY  REFORM 

of  the  United  States  in  those  Islands  would  be  productive 
of  nothing  but  disaster."  1 

(2)  The  second  argument  related  to  the  size  of  the  unit 
itself,  assuming  that  the  transition  to  the  new  basis  had 
been  successfully  accomplished.  The  United  States  dollar 
is  a  large  monetary  unit,  one  of  the  largest  in  the  world, 
the  English  pound  being  the  only  important  one  that  is 
larger.  For  a  poor  people  like  the  Filipinos,  the  great 
bulk  of  whose  transactions  were  petty,  the  dollar  unit  and 
the  various  coined  fractions  of  the  dollar  would  represent 
inconveniently  large  sums.  Referring  to  this  difficulty, 
Mr.  Charles  A.  Conant  said : 

"A  native  laborer  accustomed  to  receiving  a  peseta,  or 
20  centavos,  for  a  day's  labor,  would  find  an  American 
lo-cent  piece  less  suited  to  his  wants,  even  though  he  was 
satisfied  that  it  represented  the  same  value.  The  reason 
would  lie  in  the  fact  that  the  American  coin  would  be  less 
easily  exchangeable  for  smaller  subdivisions.  The  Ameri- 
can lo-cent  piece  is  the  smallest  silver  coin  which  can  be 
used  with  convenience,  but  the  peseta,  or  piece  of  20  centa- 
vos, is  twice  its  size  and  is  divisible  into  two  pieces  of  about 
the  size  of  the  American  lo-cent  piece,  each  representing  an 
exchange  value  of  5  cents  in  gold.  As  this  difficulty  was 
tersely  put  to  the  Schurman  Commission  in  1899  by  Mr. 
Charles  Ilderton  Barnes,  'If  the  agriculturists  are  paid  in 
gold,  they  cannot  make  that  gold  go  around  like  twice  the 
number  of  dollars  in  silver.' "  2 

As  a  partial  remedy  for  this  difficulty  Representative  E. 
J.  Hill  of  Connecticut,  a  leader  of  the  movement  in  the 
House  to  extend  the  United  States  currency  system  to  the 
Philippines,  suggested  that  an  American  half-cent  piece  be 
coined  for  circulation  in  the  Philippines.3 

1  Quoted  in  Congressional  debate,  Cong.  Rec.,  57th  Cong.,  2d  Sess.,  p.  1021. 
3  Special  Report  on  Coinage  and  Banking  in  the  Philippine  Islands. 
Made  to  the  Secretary  of  War,  1901,  pp.  9-10. 
3  Cong.  Rec.,  syth  Cong.,  2d  Sess.,  p.  1078. 


PROPOSALS  FOR  PERMANENT  CURRENCY  REFORM    305 

(3)  A  third  argument  was  that  of  the  danger  of  counter- 
feiting.    At  the  average  price  of  silver  for  the  year  1902 
the  bullion  value  of  the  United  States  silver  dollar  was 
about  41  cents  and  that  of  two  half  dollars,  four  quarters, 
or  ten  dimes  was  about  38  cents.     This  would  offer  a  large 
temptation  to  counterfeiting  in  a  country  like  the  Philip- 
pines where  labor  was  cheap,  where  many  of  the  natives 
were  exceedingly  skillful  in  handiwork  with  silver,  and  where 
a  strong  secret  service  had  not  yet  been  extended  through- 
out the  country.     Furthermore,  even  if  such  counterfeit- 
ing could  have  been  prevented  in  the  Philippines,  there 
would  have  been  the  serious  problem  of  preventing  coun- 
terfeits made  in  China  and  Japan  from  being  imported  into 
a  country  with  such  an  enormous  coast  line  as  the  Phil- 
ippines.   Java  had  experienced  serious   trouble  through 
the  counterfeiting  of  Dutch  fiduciary  silver  coins,   and 
American  silver  coins  had  already  been  to  a  considerable 
extent  counterfeited  in  the  Philippines. 

While  this  difficulty  was  a  real  one,  the  writer  is  con- 
vinced that  its  importance  was  exaggerated.  With  rapidly 
improving  conditions  in  the  Philippines  the  police  authori- 
ties undoubtedly  could  have  handled  the  situation.  Dur- 
ing recent  years  the  difference  between  the  bullion  value 
and  the  money  value  of  Philippine  silver  coins  has  fre- 
quently been  large,1  but  there  has  been  little  or  no  coun- 
terfeiting. 

(4)  The  fourth  argument  against  the  adoption  of  United 
States  currency  related  to  gold  coin.     It  was  claimed  that 
to  maintain  the  parity  of  United  States  silver  and  paper 
in  the  Philippines  with  gold,  a  gold  reserve  would  be  needed 
in  the  Islands  and  also  a  substantial  amount  of  gold  coin 
in  circulation.     But  in  oriental  countries  gold  had  a  way  of 
rapidly  disappearing  from  circulation  and  being  absorbed 
in  hoards  and  in  jewelry  and  trinkets.     Something  over 
$10,000,000  of  gold  coin  had  been  brought  to  the  Philip- 

1  Infra,  p.  353. 
x 


306  THE  PHILIPPINE  CURRENCY  REFORM 

pines  by  the  military  and  naval  authorities  prior  to  Septem- 
ber 15,  1901  and  paid  out  for  wages  and  supplies,  yet  it 
was  a  rare  thing  in  1903  to  see  a  gold  coin  in  circulation. 
It  had  been  in  part  melted  down  for  ornaments,  in  part 
hoarded  by  the  natives  and  Chinese,  and  in  part  shipped  to 
China  and  other  neighboring  countries  for  similar  purposes. 
The  attempted  provision  of  a  supply  of  gold  for  reserve 
and  circulating  purposes  in  the  Philippines,  it  was  argued, 
would  impose  upon  the  United  States  the  expenses  of  its 
shipment  from  America  to  the  Philippines,  only  to  have  it 
withdrawn  in  a  continuous  stream  from  the  Philippines 
to  China  at  the  slight  expense  of  shipment  from  Manila 
to  Hongkong.  A  long  time  would  be  required  before 
China  would  reach  the  gold  saturation  point.  This  drain 
of  gold  to  the  Orient  would  place  a  heavy  burden  on 
the  United  States  and  tend  to  deplete  unduly  its  gold 
supply. 

This  argument  carried  weight  if  one  accepted  its  major 
premise,  that  the  introduction  of  the  United  States  cur- 
rency system  into  the  Philippines  would  necessitate  a 
gold  reserve  in  Manila  and  gold  coin  in  circulation.  The 
premise,  however,  is  a  doubtful  one.  Had  the  United 
States  currency  system  been  introduced,  it  is  very  probable 
that  little  or  no  gold  coin  would  have  been  needed,  and  that 
trade  balances  would  have  been  settled  by  the  shipment 
of  United  States  paper  money,  particularly  gold  certificates, 
between  the  United  States  and  the  Philippines. 

A  Distinctive  Philippine  Coinage  on  a  Gold  Basis 

This  brings  us  to  the  third  proposal,  i.e.,  that  of  pro- 
viding a  distinctive  Philippine  coinage  on  a  gold  basis, 
with  a  peso  equal  to  fifty  cents  of  United  States  money 
as  the  unit  of  value.  Inasmuch  as  this  plan  is  the  one 
that  subsequently  became  law  it  will  be  well  to  trace 
briefly  its  historical  development. 


PROPOSALS  FOR  PERMANENT  CURRENCY  REFORM    307 

Early  Formulations  of  Plan.  The  first  official  formula- 
tion of  this  plan  was  contained  in  the  Report  of  the  Taft 
Philippine  Commission  under  date  of  January  24,  1901. * 
After  reviewing  some  of  the  evils  of  the  silver  standard 
the  Commission  said : 

"As  a  solution  of  the  problem  it  has  been  suggested  .  .  . 
that  the  United  States  dollar,  or  a  theoretical  United  States- 
Filipino  gold  peso,  of  the  value  of  half  a  dollar,  like  the 
theoretical  gold  yen  which  is  the  unit  of  currency  in  Japan, 
should  be  made  the  standard  of  value,  but  that  a  silver 
United  States-Filipino  peso,  containing  a  small  percentage 
less  silver  than  the  Mexican  dollar,  should  be  coined,  which 
would  be  receivable  in  business  transactions  as  the  equiva- 
lent of  50  cents  in  United  States  money,  together  with  con- 
venient subsidiary  coins  of  the  same  character.  The 
amount  of  silver  in  the  peso  should  be  such  a  percentage 
less  than  that  in  the  Mexican  dollar  that  its  intrinsic  value 
would  not  at  any  time  warrant  its  export  from  the  Islands, 
but  its  convertibility  into  American  money  at  uniform  fixed 
rates,  guaranteed  by  the  United  States,  would  make  it  a 
convenient  and  useful  currency  for  ordinary  business  trans- 
actions in  the  Islands.  .  .  .  The  Mexican  and  Filipino 
silver  coins  in  the  Islands  could  be  recoined  into  the  new 
United  States-Filipino  coins  as  fast  as  they  came  into  the 
treasury,  which  would  within  a  comparatively  short  time 
perform  the  functions  now  performed  by  the  Mexican  and 
Filipino  silver  coins.  At  a  suitable  later  date  the  Mexican 
and  Filipino  silver  coins  could  all  be  brought  in  for  coinage 
by  a  law  providing  that  they  should  not  be  legal  tender  after 
a  date  fixed  in  the  law.2  The  local  mint  [in  Manila]  can  be 
put  in  order  for  such  recoinage  within  one  month's  time, 
according  to  the  report  of  Major  L.  A.  Levering,  Acting 
Inspector-General." 

1  Pages  91-92. 

2  The  italics  are  mine.    This  passage  contains  an  erroneous  notion  con- 
cerning the  influence  of  the  legal  tender  quality  that  was  entertained  by 
nearly  all  officials  connected  with  the  Philippine  currency  reform  down  to 
the  latter  part  of  1903.    Cf.  infra,  pp.  330-32. 


308  THE  PHILIPPINE  CURRENCY  REFORM 

In  the  summer  of  1901  Mr.  Charles  A.  Conant  was  sent 
to  the  Philippines  by  the  War  Department  for  the  purpose 
of  consulting  with  the  Philippine  Commission  on  the  sub- 
ject of  currency  reform  in  the  Islands.  He  spent  about  a 
month  in  the  Philippines,  and  had  interviews  on  the  sub- 
ject with  leading  business  men  and  bankers,  both  in  the 
Philippines  and  in  other  oriental  countries.  His  report 
to  the  Secretary  of  War,  which  has  already  been  cited,1 
was  made  November  25,  1901.  The  result  of  his  investi- 
gations may  be  stated  in  his  own  words : 

"Examination  of  the  monetary  conditions  in  the  Philip- 
pines led  the  writer  to  accept  the  plan  recommended  by 
the  [Philippine]  Commission  in  its  report  for  1900,  in  its 
general  scope,  as  the  best  solution  of  the  difficulties  prevail- 
ing there.  It  remained,  after  reaching  this  decision,  to 
work  out  the  details  with  Judge  Henry  C.  Ide,  the  Secretary 
of  Justice  and  Finance  in  the  Philippines.  .  .  .  The  plan 
prepared  by  Judge  Ide  and  the  writer  was  submitted  to  the 
[Philippine]  Commission,  carefully  discussed  and  amended 
in  trifling  details,  and  was  then  transmitted  (in  November, 
1901)  to  the  War  Department  with  the  unanimous  approval 
of  the  Commission.  .  .  ." 2 

The  Philippine  Currency  Problem  in  the  United  States 
Congress.  The  foregoing  plan,  in  which  the  unit  of  value 
was  to  be  a  silver  peso  containing  385.8  grains  of  silver 
.835  fine,3  maintained  at  a  parity  with  50  cents  gold 
of  United  States  money,  was  approved  by  Secretary  of 
War  Elihu  Root,  and  on  January  7,  1902  bills  embodying 

1  Supra,  p.  304. 

2  Conant,  The  Currency  of  the  Philippine  Islands,  in  Ann.  Amer.  Acad. 
Pol.  and  Soc.  Sci.,  Nov.  1902,  p.  49. 

3  This  is  the  weight  but  not  the  fineness  of  the  Spanish-Filipino  pesos 
(Alfonsinos)  then  in  circulation  in  the  Philippines.     (Cf.  supra,  p.  249.) 
It  is  exactly  the  weight  but  not  the  fineness  of  two  American  half  dollars. 
For  January  1902  it  would  have  represented  an  average  bullion  value  of 
about  $0.41. 


PROPOSALS   FOR  PERMANENT  CURRENCY  REFORM    309 

it  were  introduced  in  both  houses  of  Congress ; 1  in 
the  Senate  by  Mr.  Lodge  of  Massachusetts,  chairman 
of  the  Committee  on  the  Philippines,  and  in  the  House 
by  Mr.  Cooper  of  Wisconsin,  chairman  of  the  Com- 
mittee on  Insular  Affairs.  Hearings  were  held  by  both 
committees.  The  result  was  that  the  House  Committee 
reported  favorably  the  Philippine  Commission's  plan; 
while  the  Senate  Committee,  influenced  largely  by  the  tes- 
timony of  partisan  witnesses  representing  English  banks 
with  branches  in  Manila  and  business  houses  interested 
in  the  Philippine  export  trade,  struck  out  the  Commis- 
sion's gold  standard  plan  and  substituted  a  silver  standard 
plan  providing  for  the  free  coinage  of  a  silver  dollar  con- 
taining 416  grains  of  silver  .900  fine,  i.e.,  a  dollar  of  identi- 
cal weight  and  fineness  with  the  British  dollar.  Each 
house  sustained  the  action  of  its  committee  by  a  large 
vote,  that  in  the  Senate  being  unanimous,  and  that  in  the 
House  being  89  to  55.  The  conference  committee  to  which 
the  bills  were  now  referred  could  not  reach  an  agreement 
on  the  subject  of  the  standard,  so  the  matter  of  a  thorough- 
going currency  reform  was  dropped. 

The  legislation  therefore  on  the  subject  of  the  currency 
contained  in  the  Philippine  Civil  Government  Act  of  July 
i,  1902  was  limited  to  the  subjects  of  subsidiary  and  minor 
coins.2  However,  none  of  the  subsidiary  silver  coins  here 
authorized  were  ever  coined  by  the  Philippine  Government, 
and  none  of  the  minor  coins  until  the  legislation  authorizing 
them  was  reaffirmed  the  following  year  in  the  Philippine 
Coinage  Act.3  This  subsidiary  and  minor  coin  legislation 
was  a  congressional  blunder.  Fortunately,  however,  it  did 
no  positive  harm.  Concerning  it  the  Philippine  Commission 
said  in  its  annual  Report  for  1902  : 4 

1  The  coinage  provisions  in  full  of  the  bill  will  be  found  in  House  Reps., 
5 7th  Cong.,  ist  Sess.,  IX,  No.  2496,  pp.  13-14. 

z  Fractional  silver  coins  of  50,  20,  and  10  centavos  were  to  be  coined  con- 
taining 385.8  grains  of  silver  .900  fine  to  the  peso.  Sec.  77  of  the  Act. 

3  Cf.  infra,  p.  315.  4  Part  II,  p.  706. 


310  THE  PHILIPPINE  CURRENCY  REFORM 

"It  is  not  apparent  as  to  whether  the  coins  therein  named 
are  to  be  made  legal  tender  for  dollars  payable  in  local 
currency,  such  as  at  present  exist,  or  in  a  new  local  currency 
such  as  the  Commission  have  recommended,  or  in  money 
of  the  United  States,  inasmuch  as  no  unit  of  value  is  es- 
tablished by  the  Act.  It  is  apparent  that  the  subsidiary 
and  minor  coins  referred  to  are  to  be  fractional  parts  of  some 
unit.  Without  knowing  of  what  unit  they  are  fractional 
parts,  it  would  be  very  difficult  to  provide  for  their  circula- 
tion. If  such  coins  should  be  immediately  coined  and  issued, 
and  a  subsequent  Act  of  Congress  should  make  the  unit  to 
be  the  United  States-Philipino  peso  of  50  cents  gold  value,  as 
recommended  by  the  Commission,  the  proposed  coins  would 
have  more  than  20  per  cent  greater  value  than  if  legislation 
by  Congress  should  cause  them  to  be  only  fractional  parts  of 
a  free  silver  peso  coined  under  free-coinage  principles,  or  of 
the  Mexican  peso  now  in  circulation  in  the  Islands.  With 
such  uncertainty  as  to  the  status  of  the  subsidiary  and 
minor  coins,  it  would  be  difficult  to  maintain  them  in 
general  circulation ;  the  banks  would  decline  to  pay  them 
out,  and  would  retain  them  as  fast  as  they  would  come  into 
their  possession,  in  view  of  the  fact  that,  if  the  free-coin- 
age system  or  the  continuance  of  the  Mexican  system 
should  ultimately  prevail,  they  would  lose  nothing  by  re- 
taining them  in  their  vaults,  and  that,  if  the  system  hereto- 
fore recommended  by  the  Commission  should  be  adopted, 
these  coins  would  thereby  have  fixed  and  definite  values, 
namely,  as  fractional  parts  of  a  peso  worth  50  cents,  and  the 
banks  would  thus  have  made  a  profit  of  more  than  20  per 
cent  in  the  value  of  the  coins  so  hoarded  by  the  simple 
process  of  retaining  them  from  circulation  until  the  fixed 
unit  of  value  should  have  been  adopted.  It  was  learned  that 
the  banks  were  taking  this  view  of  the  situation  and  had 
indicated  a  willingness  to  take  a  large  amount  of  the  new 
subsidiary  and  minor  coins  should  they  be  issued,  which 
manifestly  they  could  well  afford  to  do  under  such  circum- 
stances. In  view  of  all  these  facts,  on  the  3oth  day  of 
September,  1902,  the  Commission  resolved :  'That  no  action 
should  be  taken  for  the  coinage  of  the  minor  and  subsidiary 


PROPOSALS  FOR  PERMANENT  CURRENCY  REFORM    311 

coins  referred  to  until  a  unit  of  value  shall  have  been  fixed 
by  act  of  Congress  or  otherwise,  the  legislation  of  Congress 
referred  to,  being  in  the  opinion  of  the  Commission,  permis- 
sive and  not  mandatory/'3 

Again  in  its  annual  report  for  1902,  as  in  the  reports  for 
the  two  preceding  years,  the  Commission  implored  Con- 
gress to  authorize  a  gold  standard  currency  system  for  the 
Philippines  along  the  lines  of  the  Cooper  bill,1  which  in  1901 
embodied  the  plan  recommended  by  the  Commission. 
This  time  it  cited2  in  support  of  the  plan  the  testimony  of 
Professor  Jeremiah  W.  Jenks,  then  of  Cornell  University, 
who  had  just  made  an  investigation  into  economic  questions 
in  the  English  and  Dutch  colonies  in  the  Orient.3 

Early  in  the  second  session  of  the  57th  Congress 
Representative  Cooper  of  Wisconsin  again  introduced  a 
bill  (H.  R.  15,520)  embodying  the  Philippine  Commis- 
sion's plan  of  a  5o-cent  gold  standard  peso.  The  bill 
was  referred  to  the  Committee  on  Insular  Affairs,  by 
which,  on  January  9,  1903,  it  was  reported  back  to  the 
House  with  amendments  and  an  accompanying  report.4 
There  was  also  a  minority  report  of  the  Committee  pro- 
posing a  bill  (H.  R.  16,657)  extending  the  United  States 
currency  system  to  the  Philippine  Islands.  For  some 
days  the  proposals  were  debated  in  Committee  of  the 
whole,  Mr.  Cooper  of  Wisconsin  leading  the  debate  in 
favor  of  the  majority  report,  and  Mr.  Hill  of  Connecticut 
that  in  favor  of  the  minority.  The  arguments  on  both 
sides  were  essentially  those  already  outlined.6  The  ma- 
jority laid  emphasis  upon  the  fact  that  their  bill  was  sup- 
ported by  Governor  Taft,  all  the  members  of  the  Philip- 

1  Phil.  Com.  Rep.,  1902,  Part  II,  pp.  699-707. 

a  Ibid.,  pp.  703-704. 

8  Jeremiah  W.  Jenks,  Report  to  the  Secretary  of  War  on  Certain  Economic 
Questions  in  the  English  and  Dutch  Colonies  in  the  Orient,  1902,  pp.  30-31. 

4  Cf.  Cong.  Rec.,  Dec.  3, 1002,  p.  43  and  House  Reps.,  57th  Cong.,  2d  Sess., 
I,  No.  3023. 

*  Supra,  pp.  301-308. 


312  THE  PHILIPPINE  CURRENCY  REFORM 

pine  Commission,  and  by  the  experts  who  had  carefully 
studied  the  problem.  The  minority  characterized  the 
majority  bill  as  providing  a  "new  patent  hybrid  system" 
of  currency,  and  of  attempting  to  stabilize  the  silver  stand- 
ard rather  than  to  provide  a  gold  standard.1  They 
emphasized  the  simplicity  and  safety  of  the  proposal  to 
extend  the  American  currency  system  to  the  Islands,  and 
the  political  and  trade  advantages  of  having  a  uniform 
currency  throughout  the  territory  of  the  United  States. 
On  January  22  the  House,  by  a  vote  of  147  to  127,  rejected 
the  Cooper  plan  and  adopted  the  United  States  currency 
plan  of  the  minority  report,  substituting  it  for  section  i 
of  the  Cooper  bill. 

The  following  day  the  bill  (H.  R.  15,520)  so  amended 
was  introduced  in  the  Senate  by  Mr.  Lodge  of  Massachu- 
setts, read  twice  by  title,  and  referred  to  the  Committee 
on  the  Philippines.  A  new  light  on  the  subject  had  ap- 
peared to  the  members  of  this  Senate  Committee  since  the 
preceding  session  of  Congress  in  which  they  had  favored 
a  continuation  of  the  silver  standard;  for  on  January  26 
Senator  Lodge  for  the  Committee  reported  back  the  House 
bill  with  everything  struck  out  but  the  enacting  clause,  and 
with  a  plan  essentially  like  that  of  the  original  Cooper  bill 
inserted  in  its  place.2  In  defending  this  plan  Mr.  Lodge 
said:  "I  .  .  .  wish  to  say  that  the  Committee  who  were 
convinced  last  year  of  the  widom  of  the  substitute  which 
has  been  voted  down,  are  now  satisfied  by  the  change  of 
circumstances  and  in  the  rates  of  silver  in  the  East  that 


1  Representative  Hill  of  Connecticut  in  House  debates,   Cong.  Rec., 
57th  Cong.,  2d  Sess.,  p.  1053. 

2  The  full  text  of  the  bill  at  this  stage  will  be  found  in  the  Cong.  Rec., 
57th  Cong.,  2d  Sess.,  pp.  2248-49.     This  bill  made  the  unit  of  value  a  theo- 
retical gold  peso  of  12.9  grains  of  gold,  .900  fine,  equivalent  to  50  cents  of 
United  States  gold  coin.    It  raised  the  size  of  the  silver  peso  from  385.8 
grains  of  silver  .835  fine  (as  provided  in  the  original  Cooper  bill)  10416 
grains  .900  fine,  placed  a  limit  of  75,000,000  pesos  on  the  amount  that  could 
be  coined,  and  made  some  further  changes  of  minor  importance. 


PROPOSALS   FOR   PERMANENT  CURRENCY  REFORM     313 

that  legislation  is  no  longer  possible,  and  that  some  legis- 
lation in  the  nature  of  that  embodied  in  the  Senate  bill  is 
the  only  practicable  way  of  dealing  with  the  question  at 
this  time."  1  There  was  little  debate  in  the  Senate.  Sen- 
ator Dubois  of  Idaho  offered  as  a  substitute  the  silver-stand- 
ard bill  which  had  been  passed  unanimously  by  the  Senate 
at  its  previous  session,  but  it  was  rejected.2  The  bill  as 
introduced  by  Mr.  Lodge  was  passed  by  the  Senate  Feb- 
ruary 1 6.  In  this  form  it  went  to  the  House  and  was 
referred  to  the  Committee  on  Insular  Affairs.  On  Febru- 
ary 20  the  Committee  reported  it  back  with  a  few  incon- 
sequential amendments.3  The  House  now  receded  from 
its  previous  action  and  adopted  the  bill  February  24, 
1903  by  a  vote  of  139  to  io4.4  The  following  day  the 
Senate  accepted  the  amendments  of  the  House,  and  the 
bill  was  signed  by  President  Roosevelt,  March  2,  I9O3.6 

1  Cong.  Rec.,  syth  Cong.,  2d  Sess.,  p.  2251. 

2  Ibid.,  pp.  2249-51. 

3  Ibid.,  p.  2573. 

4  Ibid.,  p.  2580-81. 

6  The  account  of  the  reform  from  this  point  to  April  i,  1905  is  a  revision 
and  amplification  of  the  author's  article  on  The  Establishment  of  the  Gold- 
Exchange  Standard  in  the  Philippines,  published  in  the  Quarterly  Journal  of 
Economics  for  August  1905,  pp.  585-609. 


CHAPTER  V 

THE  FUNDAMENTAL  LAWS  OF  THE  PHILIPPINE  CURRENCY 

REFORM 

THE  fundamental  laws  of  the  Philippine  currency  reform 
were  the  Philippine  Coinage  Act,  whose  enactment  by  the 
United  States  Congress  was  discussed  in  the  preceding 
chapter,  and  the  Philippine  Gold  Standard  Act,  which  was 
passed  about  seven  months  later  by  the  Philippine  Govern- 
ment under  the  authority  given  in  the  Philippine  Coinage 
Act.  It  will  be  the  object  of  this  chapter  to  describe  the 
main  provisions  of  these  two  laws. 

The  Philippine  Coinage  Act 

The  main  provisions  of  this  Act  were  as  follows : 

(1)  The  establishment  of  a  gold  standard  with  a  theo- 
retical gold  peso  (like  the  theoretical  gold  yen  of  Japan), 
consisting  of  12.9  grains  of  gold  .900  fine,  as  the  unit  of  value. 
This  unit  was  equivalent  to  exactly  one  tenth  of  a  five 
dollar  gold  piece  or  to  50  cents  United  States  currency. 

(2)  The  coinage  of  a  silver  peso  containing  416  grains 
of  silver  .900  fine,  and  of  subsidiary  coins  of  proportionate 
weights  1  and  the  same  fineness,  the  peso  to  represent  the 
above-mentioned  gold  unit  of   value.     This    silver   peso 
weighed  about  0.44  per  cent  more  than  an  American  silver 
dollar  and  about  0.40  per  cent  less  than  a  Mexican  peso ; 
its  fine  silver  content  was  about  0.85  per  cent  larger  than 
that  of  the  American  dollar  and  about  0.70  per  cent  smaller 

1  The  10  and  20  centavo  pieces  contained  half  a  grain  less  to  the  peso  than 
the  peso  piece. 


FUNDAMENTAL  LAWS  315 

than  that  of  the  Mexican  peso.  At  the  average  price  of 
silver  in  London  for  February  1903  —  the  month  just 
preceding  the  date  of  the  passage  of  the  Act  —  the  bullion 
value  of  this  coin  was  $0.3777.  The  money  value  of  the 
coins  was  thus  3 2. 4  per  cent  greater  than  the  bullion  value. 
This  appeared  to  be  an  ample  margin  of  safety.  Minor 
coins  of  nickel  and  copper  had  been  provided  for  in  the 
Philippine  Civil  Government  Act  of  July  i,  1902,*  and 
the  legislation  authorizing  them  was  reaffirmed. 

(3)  The  issuance  of  silver  certificates,  similar  to  the  gold 
and  silver  certificates  of  the  Unite  States,  against  which 
silver  pesos  of  an  equal  value  were  to  be  held  in  reserve. 
Certificates  were  to  be  in  denominations  of  P2,  ?5,  and 
Pro. 

(4)  The  establishment  of  a  gold  reserve  for  the  main- 
tenance of  the  parity  of  the  coins  with  gold  and  for  the 
provision  of  funds  for  the  initial  purchases  of  silver  re- 
quired for  the  coinage.    To  this  end  the  Act  authorized  the 
issuance  by  the  Philippine  Government  of  temporary  cer- 
tificates of  indebtedness  to  the  amount  of  $10,000,000, 
paying  4  per  cent  interest,  and  redeemable  in  gold  coin  of 
the  United  States  at  the  end  of  one  year. 

(5)  The  making  of  gold  coins  of  the  United  States  and 
new   Philippine  silver  pesos  unlimited    legal    tender    for 
future  obligations,  "unless  otherwise  specifically  provided 
by  contract."     Debts  contracted  prior  to  December  31, 
1903  were  made  payable  in  the  legal  tender  currency  exist- 
ing at  the  time  of  the  making  of  the  contracts,  unless  other- 
wise   specifically    provided.     The    new    subsidiary    silver 
coins  were  made  legal  tender  to  the  amount  of  ten  pesos. 
Section  13  of  the  Act  removed  the  legal  tender  quality 
after  December  31,  1903  from  all  other  kinds  of  money 
circulating  in  the  Islands.2 

1  Cf.  supra,  p.  309. 

*  As  a  result  of  an  oversight,  the  sweeping  legal  tender  provision  of  this 
section  removed  the  limited  legal  tender  quality  from  the  minor  coins  of 


316  THE  PHILIPPINE  CURRENCY  REFORM 

These  are  the  essential  points  of  the  currency  scheme 
as  laid  down  by  Congress.  Wide  discretionary  powers 
were  left  to  the  Philippine  Government,  which  was  to  con- 
struct the  Philippine  currency  system  within  the  broad 
lines  laid  down  by  the  Act  of  Congress. 

Immediately  upon  the  passage  of  the  Act  arrangements 
were  made  through  the  Bureau  of  Insular  Affairs  at  Wash- 
ington for  the  issue  and  sale  of  the  certificates  of  indebt- 
edness. Three  million  dollars  worth  of  these  certificates 
were  sold  in  March  and  three  million  more  in  August.  The 
facts  that  the  certificates  were  placed  upon  the  market  at 
favorable  times,  and  that  the  Secretary  of  the  Treasury 
agreed  to  accept  them  as  security  for  the  deposit  of  govern- 
ment funds  in  national  banks,  resulted  in  their  being  taken 
up  at  very  favorable  rates.1  The  premiums  realized,  to- 
gether with  the  interest  obtained  on  the  proceeds  while 
they  were  deposited  in  New  York,  actually  yielded  the 
Government  for  some  time  a  direct  net  income  on  its  debt. 

The  new  Philippine  coins  began  to  arrive  in  Manila  from 
the  United  States  mints  in  the  fore  part  of  June  1903,  and 
were  first  placed  in  circulation  on  July  23  by  means  of 
deposits  in  certain  Manila  banks  and  payments  for  salaries 
and  other  government  obligations.  The  parity  of  the 
new  coins  was  maintained  at  first  through  their  redemption 
in  United  States  money  on  demand  at  the  rate  of  P2  for 
$i  at  the  Philippine  treasury. 

The  Philippine  Government  had  early  taken  measures 
to  transfer  the  Government's  business  to  the  new  cur- 
rency basis  as  soon  as  this  currency  should  be  put  in  cir- 
culation. Governor  Taft  issued  an  executive  order  May 
1 6  directing  disbursing  officers  to  deposit  in  the  insular 

nickel  and  copper  whose  coinage  had  been  authorized  by  the  Act  of  July  i, 
1902.  The  result  is  that  it  is  impossible  to  this  day  to  pay  completely  with 
legal  tender  money  a  debt  involving  an  odd  amount  requiring  the  use  of 
minor  coins. 

1  The  premiums  realized  on  these  first  two  issues  were  2.513  per  cent  and 
2.24  per  cent  respectively. 


FUNDAMENTAL  LAWS  317 

treasury  such  local  currency  in  their  possession  as  was 
not  needed  to  complete  their  disbursements  for  the  fiscal 
year  ending  June  30,  and,  upon  closing  their  accounts  for 
the  fiscal  year,  to  deposit  at  once  all  local  currency  bal- 
ances due  the  Government.1  On  July  13  he  issued  another 
executive  order  requiring  that  "all  contracts  hereafter 
made  by  the  various  bureaus  and  officers  should  provide 
for  payment  in  the  new  Philippine  currency  or  the  estab- 
lished equivalent  in  United  States  currency,  at  the  option 
of  the  Government,  and,  where  possible,  all  existing  con- 
tracts should  be  so  amended."2  The  order  further  pro- 
vided that  all  wages  of  insular  employees  should  be  re- 
adjusted and  made  payable  in  Philippine  currency  or  in 
United  States  currency.  Again,  on  July  30,  another 
executive  order  was  issued 3  authorizing  the  Insular  Treas- 
urer to  exchange  the  new  currency  for  the  old  at  the 
official  rate  with  the  various  provincial  treasurers,  and 
making  the  cost  of  transportation  a  proper  charge  upon  the 
insular  treasury. 

The  writer  arrived  in  Manila,  August  i,  1903,  and  from 
that  time  until  February  1906  acted  as  "expert  adviser" 
to  the  Philippine  Government  in  the  work  of  the  currency 
reform. 

Philippine  Gold  Standard  Act 

On  October  10,  1903  the  Philippine  Gold  Standard  Act4 
was  passed  by  the  Commission.  It  has  previously  been 
noted  that  the  Philippine  Coinage  Act  of  Congress  left 
the  working  out  of  the  details  of  the  new  currency  sys- 
tem to  the  discretion  of  the  Philippine  Commission.  It 
was  to  fill  in  these  details  and  to  establish  the  proper  ad- 
ministrative machinery  for  the  inauguration  and  main- 
tenance of  the  new  system  that  the  Philippine  Gold  Stand- 
ard Act  was  passed.  The  immediate  problem  to  be  met 

1  Executive  Orders  and  Proclamations,  1903,  pp.  47-48. 

8  Ibid.,  p.  67.  » Ibid.,  p.  85.  4  Act  938. 


318  THE  PHILIPPINE  CURRENCY  REFORM 

was  the  creation  of  a  mechanism  for  the  maintenance  of 
the  parity  of  30  to  40  millions  of  pesos  of  the  new  silver  coins 
with  gold,  and  for  the  adjustment  of  the  currency  supply  to 
the  demands  of  trade ;  also  to  provide  a  machinery  for  the 
exchange  of  pesos  for  silver  certificates,  and  of  silver  cer- 
tificates for  pesos. 

The  Philippine  Gold  Standard  Act  placed  the  new  cur- 
rency upon  the  gold-exchange  standard.  Its  principal  pro- 
visions may  briefly  be  summarized  as  follows : 

(1)  The   establishment  in   the  insular    treasury   of    a 
separate  and  trust  fund,  to  be  known  as  the  Gold  Stand- 
ard Fund,  this  fund  to  be  composed  of  all  the  proceeds 
of  the  certificates  of  indebtedness  previously  referred  to, 
of  all  seigniorage  profits  realized  in  the  coinage  of  the  new 
currency,  of  all  profits  from  the  sale  of  exchange,  and  of 
"all  other  receipts  in  the  insular  treasury  inuring  to  the 
Insular  Government  in  the  exercise  of  its  function  of  fur- 
nishing  a    convenient    currency   for    the   Islands."     The 
fund  must  be  used  exclusively  for  the  maintenance  of  the 
parity  of  the  new  currency  and  the  expenses  incident 
thereto,  including  the  purchase  of  bullion  for  new  coinage 
and  its  transportation,  mintage,  etc.    The  law  provided  that 
part  of  the  Fund  should  be  held  in  Manila  and  part  in  New 
York. 

(2)  "For  the  purpose  of  facilitating  the  more  efficient 
discharge  of  the  functions  of  the  Insular  Government  with 
respect  to  the  circulation  of  the  currency  .  .  .  and  for  the 
purpose  of  maintaining  the  parity"  there  was  created  in 
the  Bureau  of  the  Insular  Treasury  a  division  known  as 
the  Division  of  the  Currency,  presided  over  by  an  officer 
known  as  the  Chief  of  the  Division  of  the  Currency.1 

(3)  For  the  maintenance  of  the  parity  three  forms  of 

1  Upon  the  passage  of  the  Philippine  Gold  Standard  Act,  the  writer  was 
appointed  to  the  position  of  the  Chief  of  the  Division  of  the  Currency,  which 
he  held  until  February  1906,  when  the  establishment  of  the  gold-exchange 
standard  was  completed. 


FUNDAMENTAL  LAWS  319 

redemption  were  provided  in  the  law,  the  principal  one 
being  mandatory  on  the  part  of  the  Government,  and  the 
other  two  incidental  and  optional :  (a)  The  Insular  Treas- 
urer was  authorized  and  directed  to  sell  on  demand,  for 
Philippine  or  United  States  currency,  drafts  on  the  Gold 
Standard  Fund  in  New  York,  charging  for  the  same  a 
premium  of  three  fourths  of  i  per  cent  for  demand  drafts 
and  of  i^  per  cent  for  telegraphic  transfers.  The  deposi- 
tary of  the  Gold  Standard  Fund  in  New  York  was  likewise 
directed  to  sell  exchange  on  the  Gold  Standard  Fund  in 
Manila,  charging  therefor  the  same  premium  rates.1 
(b)  On  the  approval  of  the  Secretary  of  Finance  and 
Justice,  the  Insular  Treasurer  was  authorized  to  exchange 
United  States  paper  currency  for  Philippine  currency, 
and  Philippine  currency  for  United  States  paper  currency, 
at  the  rate  of  two  pesos  Philippine  currency  for  one  dollar 
United  States  currency,  (c)  On  the  approval  of  the  Sec- 
retary of  Finance  and  Justice,  the  Insular  Treasurer  was 
authorized  to  exchange  for  Philippine  currency  United 
States  gold  coin  or  gold  bars,  charging  for  the  same  a 
premium  sufficient  to  cover  the  expenses,  at  commercial 
rates,  of  transporting  United  States  gold  coin  from  New 
York  to  Manila. 

All  money  presented  to  the  Insular  Treasury  for  re- 
demption or  for  the  purchase  of  exchange  on  New  York, 
pursuant  to  the  above  provisions  of  law,  must  be  im- 
mediately withdrawn  from  circulation  and  not  paid  out 
again  except  in  response  to  similar  counter-demands,  or 
for  the  purchase  of  bullion  to  provide  an  increase  in  coin- 
age, or  to  meet  certain  expenses  incidental  to  the  intro- 
duction and  maintenance  of  the  currency. 

The  object  of  the  sale  of  drafts  above  mentioned  was  to 

1  On  November  2,  1904  the  rates  in  New  York  for  drafts  on  the  Gold 
Standard  Fund  in  the  Philippines  were  reduced  to  three  fourths  of  i  per 
cent  for  telegraphic  transfers  and  three  eighths  of  i  per  cent  for  demand 
drafts.  Cf.  infra,  p.  321  and  356. 


320  THE  PHILIPPINE  CURRENCY  REFORM 

provide  a  means  for  the  maintenance  of  the  parity,  and, 
to  that  end,  of  automatically  adjusting  the  currency  supply 
to  the  demands  of  trade  without  the  necessity  of  intro- 
ducing gold  coins  into  circulation;  in  other  words,  to 
create  "a  gold  standard  without  a  gold  currency."  While 
the  plan  was  not  a  new  one,  it  had  probably  never  been 
attempted  elsewhere  on  such  a  large  and  systematically 
worked  out  plan  as  in  the  Philippines  at  this  time.1  The 
new  Philippine  currency  is  capable  of  performing  all  the 
functions  of  a  gold  currency  except  that  of  being  shipped 
to  and  from  foreign  countries  in  settlement  of  trade  bal- 
ances. This  function  of  money,  or  of  bullion  which  is 
promptly  exchangeable  for  money  on  demand,  is  not  only 
important  because  it  is  the  means  by  which  foreign  trade 
balances  are  settled  when  they  become  unusually  heavy 
in  one  direction  or  the  other,  but  it  is  still  more  impor- 
tant because  it  is  through  the  exercise  of  this  function  that 
the  currency  supply  is  adjusted  to  the  currency  demand, 
and  that  its  parity  is  maintained  through  a  reduction  in 
the  circulation  in  times  of  relative  redundancy  and  an  in- 
crease in  times  of  relative  scarcity. 

It  is  a  familiar  principle  that,  when  the  balance  of  trade 
becomes  strongly  "unfavorable"  in  gold  standard  coun- 
tries, i.e.,  when  the  currency  becomes  relatively  redun- 
dant, exchange  rates  move  to  the  gold-export  point  and  gold 
is  exported,  and,  on  the  other  hand,  when  the  balance  of 
trade  becomes  strongly  " favorable,"  i.e.,  when  the  cur- 
rency becomes  relatively  scarce,  exchange  rates  move  to 
the  gold-import  point  and  gold  is  imported.  All  the 
expenses  of  shipping  the  gold,  including  those  of  freight, 
insurance,  interest,  and  abrasion,  are  borne  by  the  shipper. 
Under  the  gold-exchange  standard,  as  it  exists  in  the  Philip- 
pines, the  premiums  charged  by  the  Government  in  Manila 
for  exchange  on  New  York,  and  in  New  York  for  exchange 
on  Manila,  are  fixed  so  as  to  represent  as  nearly  as  possible 
*Cf.  supra,  pp.  122-23. 


FUNDAMENTAL  LAWS  321 

the  actual  commercial  cost  of  shipping  gold  bars  between 
the  two  cities.1 

When,  for  example,  exchange  rates  in  Manila  on  New 
York  reach  the  gold-export  point,  the  actual  gold  is  not 
exported,  as  in  the  United  States  and  other  strictly  gold 
standard  countries,  but  the  Government  gives  the  would- 
be  gold  exporter,  in  exchange  for  his  Philippine  currency 
in  Manila,  the  gold  credit  in  New  York,  and  charges  him 
for  the  transfer  simply  the  amount  the  actual  exportation 
of  gold  bars  to  New  York  would  have  cost  him,  were  he 
to  have  exported  gold.  Thus  there  is  removed  from 
circulation  an  amount  of  coin  (in  addition  to  the  premium 
charged)  equivalent  to  the  amount  he  would  have  shipped. 
When,  on  the  other  hand,  exchange  rates  in  New  York  on 
Manila  reach  the  point  at  which  it  would  be  profitable  to 
export  United  States  currency  from  New  York  to  the 
Philippines,  the  authorized  agents  of  the  Philippine  Gov- 
ernment in  New  York  give  the  would-be  currency  exporter 
in  New  York,  in  exchange  for  United  States  currency  paid 
into  the  Gold  Standard  Fund  there,  Philippine  currency 
laid  down  in  Manila,  and  charge  him  in  the  same  manner 
a  premium  sufficient  to  cover  the  expenses  the  actual 
shipment  of  the  currency  would  otherwise  have  involved. 
When  the  drafts  are  cashed  in  Manila  an  equivalent  amount 
of  money  is  put  into  circulation  from  the  Gold  Standard 
Fund.  The  system  is  just  as  automatic  in  its  regulation 
of  the  money  supply  as  the  strict  gold  standard,  although 
there  is  no  gold  in  circulation  and  no  gold  reserve  in  the 
Philippines;  and  no  gold  or  other  currency  worth  men- 
tioning is  now  shipped  back  and  forth  between  the  Phil- 
ippines and  the  United  States  in  settlement  of  trade  bal- 

1  As  noted  on  page  319  the  rate  charged  by  the  Philippine  Government's 
agent  in  New  York  for  exchange  on  the  Philippines  was  reduced  in  Novem- 
ber 1904  below  the  gold-import  point  for  the  Philippines.  This  reduction 
in  rate  was  to  prevent  the  settlement  of  trade  balances  by  the  shipment  of 
United  States  paper  currency,  which  could  be  imported  more  cheaply  than 
could  gold  bars, 

y 


322  THE  PHILIPPINE  CURRENCY  REFORM 

ances.  Aside  from  such  official  transfers  as  those  for  the 
army  and  navy,  the  Government  has  nothing  to  do  with 
commercial  exchange  except  at  the  gold  and  currency 
shipping  points.  These  points  represent  the  limits  of 
fluctuation  in  the  gold-exchange  value  of  the  peso  which 
the  Government  imposes.  Commercial  rates  cannot  appre- 
ciably exceed  nor  fall  below  these  respective  limits. 

Another  method  of  settling  trade  balances  was  rendered 
possible  under  the  law,  for  the  occasions  when  exchange 
rates  should  be  unfavorable  for  settling  balances  with  other 
countries  by  means  of  New  York  exchange.  The  law 
authorized  the  Treasurer  of  the  Philippine  Islands,  on  the 
approval  of  the  Secretary  of  Finance  and  Justice,  to  sell 
United  States  gold  coin  or  gold  bars  at  a  premium  not 
greater  than  sufficient  to  cover  the  expenses  of  shipping  gold 
coin  from  New  York  to  Manila.1  A  small  premium  on  gold 
coin  and  gold  bars  seemed  necessary  to  protect  the  Govern- 
ment from  the  trouble  and  expense  of  shipping  gold  from 
the  United  States  to  Manila,  only  in  turn  to  have  it  melted 
down,  hoarded,  or  shipped  to  China  and  other  neighboring 
countries  at  the  slight  expense  involved  in  its  shipment  to 
those  places  from  Manila.  This  provision  of  the  law  has 
never  been  utilized. 

The  exchange  by  the  Insular  Treasurer  of  Philippine 
currency  for  the  various  kinds  of  United  States  paper 
currency,  and  of  the  various  kinds  of  United  States  paper 
currency  for  Philippine  currency,  which  the  law  author- 
izes, on  the  approval  of  the  Secretary  of  Finance  and  Jus- 
tice, found  its  raison  d'etre  in  the  considerable  amounts  of 
United  States  currency  circulating  in  the  Islands,  the 
existence  of  many  contracts  payable  in  United  States  cur- 
rency, the  absence  of  any  Philippine  currency  notes  of 
large  denominations,2  and  the  convenience  of  persons 
traveling  to  and  from  the  home  land. 

1  Cf.  supra,  p.  319. 

2  The  Act  of  Congress  approved  February  6,  1905  authorized  the  issuance 


FUNDAMENTAL  LAWS  323 

United  States  silver,  nickel,  and  copper  coins  were  not 
recognized  in  the  Philippine  Gold  Standard  Act.  Their 
circulation  in  the  Islands  had  been  found  undesirable  be- 
cause of  their  liability  to  be  counterfeited  and  of  the  diffi- 
culty of  readily  distinguishing  them  from  similar  Philip- 
pine coins  having  but  half  the  value. 

of  Philippine  silver  certificates  in  denominations  as  high  as  500  pesos.  Up 
to  that  time  the  lo-peso  certificate  was  the  largest  denomination  in  circula- 
tion. The  bank  notes  of  the  Spanish-Filipino  Bank  were  in  denominations 
ranging  from  5  to  200  pesos. 


CHAPTER  VI 

WITHDRAWAL  OF  LOCAL  CURRENCY  FROM  CIRCULATION 

A  SERIOUS  problem  which  early  presented  itself  to  the 
Philippine  Government  was  that  of  the  withdrawal  of  the 
old  currency  from  circulation.1  Here  was  a  circulating 
medium  the  great  bulk  of  which  had  existed  in  the  Islands 
for  generations.  It  had  in  its  favor  all  the  prestige  and 
prejudice  which  generations  of  use  can  create  among  an 
oriental  people.  The  problem  of  displacing  it  by  a  new 
and  unfamiliar  currency  would,  under  any  circumstances, 
have  been  a  difficult  one.  In  this  case,  however,  it  was 
rendered  especially  so  by  the  fact  that  the  new  coins  were 
worth  more  in  exchange  for  gold  than  were  the  coins  in 
circulation.  The  new  currency  was  thus  the  dearer  one, 
and  the  old,  being  the  cheaper,  had  behind  it  the  tremen- 
dous force  of  self-interest  as  exemplified  in  Gresham's 
familiar  law. 

The  Spanish-Filipino  money  was  looked  upon  as  in  a 
peculiar  sense  the  money  of  the  country,  and  the  Phil- 
ippine Government  felt  itself  morally  bound  to  make 
careful  provision  for  its  redemption.  Towards  the  Mexi- 
can currency  and  the  other  foreign  coins  in  circulation  in 
the  Islands  the  Government  did  not  feel  the  same  degree 
of  moral  obligation.  The  importation  of  these  coins,  it 
will  be  recalled,  had  been  prohibited  from  1877  to  August 
1898,  and  a  goodly  portion  of  those  in  circulation  had 
been  illicitly  smuggled  into  the  Islands  with  the  connivance 

1  For  an  account  of  the  character  and  amount  of  this  currency  see  supra, 
pp.  249-53- 

3*4 


WITHDRAWAL  OF  LOCAL  CURRENCY  325 

of  Spanish  customs  officials.1  The  Mexican  peso,  more- 
over, was  an  important  article  of  merchandise  throughout 
the  Orient,  carried  with  it  approximately 2  its  full  value  in 
silver  bullion,  and  was  thought  to  be  well  able  to  take 
care  of  itself. 

The  bankers  of  Manila  and  a  large  number  of  the  more 
prominent  business  men  of  the  Islands  strongly  urged 
upon  the  Government  the  redemption  of  all  the  old  local 
currency  at  par  in  the  new  Philippine  currency.  Many 
arguments  were  advanced  in  favor  of  this  plan,  the  strong- 
est of  which  were :  first,  that  it  would  greatly  expedite  the 
transition  to  the  new  currency  and  materially  reduce  the 
unsettlement  of  business  which  always  characterizes  such 
a  transition  period ;  and,  second,  that  to  the  great  mass  of 
natives  who  bought  and  sold  only  native  produce,  and 
who  seldom,  if  ever,  came  into  contact  with  gold  prices, 
the  new  peso  would  for  a  long  time  have  no  more  pur- 
chasing power  than  the  old,  and  that  to  compel  these  hold- 
ers of  the  old  currency  to  exchange  it  for  the  new  at  a 
discount  would  involve  them  in  an  actual  loss. 

Despite  the  great  force  of  these  arguments,  especially  the 
latter,  there  seemed  to  be  insuperable  obstacles  to  the 
redemption  of  the  old  currency  at  par.  The  amount  of 
this  currency  in  the  Islands  was  unknown  and  estimates 
varied  widely.3  The  redemption  of  all  the  local  currency 

1  Cf.  supra,  pp.  247-48. 

2  Cf.  supra,  p.  251. 

8  In  the  latter  part  of  1903  the  writer  made  an  estimate  of  the  amount  of 
Spanish-Filipino  currency  and  Mexican  currency  in  the  Islands.  The 
method  employed  was  to  compute  for  a  certain  date  the  amounts  of  the 
different  kinds  of  currency  in  the  Philippine  banks  and  the  insular  treasury. 
It  was  known  that  there  were  in  the  country  5,500,000  Alfonsinos.  As- 
suming that  the  Alfonsinos  in  general  circulation  bore  the  same  proportion 
to  the  Mexican  pesos  and  to  the  other  Spanish-Filipino  pesos  that  they  bore 
in  these  bank  and  treasury  holdings,  and  making  allowance  for  currency  ex- 
ports and  imports  subsequent  to  the  date  for  which  the  figures  were  com- 
puted, the  writer  arrived  by  a  simple  calculation  in  proportions  at  Pfs. 
10,000,000  for  the  Spanish-Filipino  currency,  in  addition  to  the  Pfs.  5,500,000 
Alfonsinos,  and  at  Pfs.  15,000,000  for  the  Mexican  currency.  The  total 


326  THE  PHILIPPINE  CURRENCY  REFORM 

at  par  would  have  meant  the  redemption  of  Mexican  pesos 
at  a  rate  above  their  bullion  value  and  above  the  values  at 
which  they  would  otherwise  have  circulated.  Subsequent 
fluctuations  of  silver  showed  that  the  prices  paid  for  Mexi- 
can pesos  would  have  varied  from  about  2  to  16  per  cent 
above  their  value  as  bullion.  Estimates  made  at  the  time 
showed  that  it  would  be  necessary  for  the  Government  to 
redeem  the  Spanish-Filipino  money  at  a  discount  of  about 
1 5  per  cent  if  it  were  to  avoid  a  net  loss  in  the  recoinage  of 
this  money  into  the  new  currency,  to  say  nothing  of  realiz- 
ing any  seigniorage  profits.  It  has  since  proven  that  the  net 
loss,  inclusive  of  seigniorage,  which  the  Government  would 
have  suffered  by  redeeming  the  Spanish-Filipino  currency 
at  par  would  have  varied  from  something  like  16  to  30  per 
cent,  according  to  the  market  price  of  silver.  Premiums 
like  those  above  mentioned  on  Mexican  pesos  would  cer- 
tainly have  led  to  the  smuggling  of  this  money  into  the 
Islands.  The  Philippines  possess  an  enormous  coast  line, 
their  distance  from  neighboring  countries  is  small,  most  of 
these  countries  were  saturated  with  Mexican  pesos,  and 
the  Chinaman  is  an  adept  smuggler  with  plenty  of  experi- 
ence gained  in  the  smuggling  of  Mexican  pesos  during  the 
Spanish  regime.1  Moreover,  the  large  expense  which  the 
redemption  of  local  currency  at  par  would  have  imposed 
upon  the  Government  would  have  had  to  be  borne  by  the 
entire  people  in  the  form  of  increased  taxes,  while  the 
profits  would  have  been  realized  not  so  much  by  the  masses 
as  by  the  Chinese  smugglers  and  by  the  wealthier  classes 
of  the  population  in  whose  hands  the  bulk  of  the  local 
currency  was  held. 

The  argument  advanced  that  the  Philippine  Government 

was  therefore  estimated  at  Pfs.  30,500,000,  exclusive  of  bank  notes,  Chinese 
subsidiary  silver,  various  kinds  of  copper  coins,  and  certain  old  Spanish 
coins.  The  practical  completion  a  few  years  later  of  the  work  of  withdrawing 
this  old  currency  from  circulation  proved  the  substantial  accuracy  of  this 
estimate.  Cf.  infra,  p.  345-46. 
1  Cf.  supra,  pp.  248-49. 


WITHDRAWAL  OF  LOCAL  CURRENCY  327 

was  under  a  moral  obligation  to  redeem  the  old  currency  at 
par  did  not  appeal  strongly  to  the  Government.  For  some 
time,  the  Mexican  peso,  together  with  the  various  kinds 
of  Spanish-Filipino  money  and  other  money  circulating  in 
the  Islands,  had  fluctuated  with  the  market  price  of  the 
Mexican  peso  in  the  oriental  markets,  and  closely  in  har- 
mony with  the  fluctuations  in  the  London  price  of  silver. 
It  was  difficult  for  the  Government  to  see  why  it  was 
morally  bound  to  redeem  this  currency  at  gold  prices 
varying  from  4  to  18  per  cent  higher  than  those  at  which  it 
had  for  some  time  circulated,  and  would  have  continued  to 
circulate  had  the  Government  not  taken  measures  for  its 
withdrawal.  After  a  careful  study  of  the  situation  and 
consultation  with  the  authorities  at  Washington,  it  was 
unanimously  decided  by  the  Philippine  Commission  that 
the  circumstances  did  not  justify  the  enormous  risk  and 
expense  which  the  redemption  of  the  old  currency  at  par 
would  make  necessary. 

Fortunately  for  the  displacement  of  the  old  currency 
by  the  new,  although  unfortunately  in  every  other  way  for 
the  Islands,  the  Philippine  rice  crop  for  1903  was  almost  a 
complete  failure.  Over  thirty  million  pesos'  worth  of 
rice  was  imported  into  the  Islands  during  the  year,  and, 
largely  in  consequence  of  this  fact,  the  balance  of  trade 
was  strongly  against  the  Islands,  and  there  was  during 
the  year  a  net  commercial  exportation  of  over  fifteen 
million  Mexican  pesos.  This  outward  movement  of  Mexi- 
can pesos  was  somewhat  further  stimulated,  no  doubt, 
by  the  anticipated  and  actual  introduction  of  the  new 
currency  and  the  Government's  declared  future  policy  of 
discriminating  against  the  old  currency. 

Unfavorable  Public  Reception  of  the  New  Currency 

The  new  Philippine  coins  began  to  arrive  in  Manila  from 
the  United  States  mints  in  the  fore  part  of  June  1903,  and 


328  THE  PHILIPPINE  CURRENCY  REFORM 

were  first  placed  in  circulation,  as  previously  stated,  during 
the  latter  part  of  July.  The  reception  given  to  the  new 
currency  by  the  public  was  at  first  not  a  hearty  one.  The 
new  peso  was  no  larger  than  the  Mexican  peso,  upon  the 
basis  of  which  prices  had  been  adjusted  for  generations, 
and  the  Chinese  and  natives  could  not  see  why  it  should 
be  worth  any  more.  In  fact  for  some  time  many  of  them, 
under  the  influence  of  custom,  actually  preferred  the  old 
pesos  with  which  they  were  familiar,  even  at  the  same  rate. 
During  the  period  from  August  i,  1903  until  the  end  of 
the  calendar  year,  a  new  Philippine  peso  could  be  exchanged 
at  the  banks  or  the  Chinese  exchange  shops  of  Manila  at 
anywhere  from  Pfs.  1.04  to  Pfs.  1.18.  The  great  majority 
of  merchants  and  shopkeepers,  however,  would  accept  the 
new  pesos  simply  as  the  equivalent  of  the  old.1  It  was  but 
natural,  therefore,  that  the  old  money  should  be  preferred 
to  the  new  by  all  persons  who  had  money  to  spend  in  the 
Islands.  It  cost  less  and  went  as  far.  Being  the  cheaper 
money,  it  tended  quickly  to  drive  the  new  money  out  of 
circulation  on  the  principle  of  Gresham's  law.  Persons 
receiving  the  new  money  from  the  Government  promptly 
exchanged  it  at  a  premium  at  the  banks  and  the  shops  of 
the  Chinese  money-changers  for  the  old  currency,  while  the 
banks  in  turn  presented  the  new  currency  to  the  Govern- 
ment for  United  States  currency  or  for  the  purchase  of  New 
York  drafts  to  be  shipped  out  of  the  Islands  in  settlement 
of  the  heavy  unfavorable  trade  balance  existing  at  the  time. 
Later,  when  the  balance  of  trade  changed,  foreign  credits  set 
up  by  these  Gold  Standard  Fund  drafts  were  drawn  upon 
to  purchase  Mexican  currency  for  importation,  thereby 
creating  an  "endless  chain."  Almost  as  rapidly  as  the 
new  currency  was  paid  out  during  August  and  September 
it  came  back  to  the  Government  through  these  channels.2 

1  The  European  and  American  stores  handling  largely  imported  goods 
were  exceptions  to  this  rule. 

*  The  members  of  the  Philippine  Commission  who  formulated  the  plan 


WITHDRAWAL  OF  LOCAL  CURRENCY  329 

The  currency  tangle  was  the  popular  topic  of  conversa- 
tion among  Europeans  and  Americans  in  the  Philippines. 
It  was  featured  in  the  newspapers,  and  the  Government's 
"currency  reform"  was  made  the  object  of  criticism  and 
ridicule. 

The  difficulty  was  partly  remedied  in  Manila  by  an 
ordinance  passed  by  the  Municipal  Board,  on  the  recom- 
mendation of  the  writer,  requiring  all  merchants  in  the 
city  to  post  in  their  places  of  business  placards  stating  in 
the  English,  Spanish,  and  Tagalog  languages  in  what 
currency  their  prices  were  fixed,  and  at  what  rates  they 
received  the  various  other  currencies  circulating  in  Manila.1 
Over  seven  thousand  of  these  placards,  with  changeable 
rate  slips  attached,  were  distributed  free  of  charge  in  the 
city.  The  result  was  favorable.  The  people  soon  learned 
at  what  stores  they  could  get  the  full  value  of  their  new 

for  the  Philippine  gold  standard  in  1901  and  1902,  the  experts  who  assisted 
them  in  connection  with  the  drafting  of  the  early  legislation,  and  the 
congressional  leaders  all  appear  to  have  failed  to  anticipate  this,  the  most 
serious  difficulty  encountered  in  the  inauguration  of  the  gold  standard  in 
the  Philippines.  They  all  placed  too  much  reliance  upon  the  effective- 
ness of  removing  the  legal  tender  quality  from  the  old  money  in  forc- 
ing it  out  of  circulation  —  a  measure  which  seems  to  have  had  little 
or  no  influence.  The  only  person  who  appears  to  have  anticipated  the 
difficulty  to  any  extent  was  Senator  Rawlins  of  Utah,  who,  in  the  Senate, 
February  25,  1903,  took  the  position  that  the  plan  proposed  would  lead  to  a 
dual  currency.  He  said :  "We  shall  then  have  the  Mexican  money  now  in 
circulation  and  the  money  provided  by  this  bill,  the  former  the  only  money 
with  which  the  native  inhabitants  are  familiar.  The  present  currency,  of 
greater  stability  and  value  in  its  purchasing  power,  will  be  demanded  by  the 
foreigners  and  by  the  Americans.  There  is  a  rule  that  cheap  money  drives 
out  good  money ;  but  it  is  very  questionable  whether  the  Mexican  currency 
in  the  Philippine  Islands  will  ever  be  driven  out  by  the  currency  which  this 
bill  is  intended  to  provide.  ...  If  this  bill  provided  that  on  or  before  a 
certain  date  the  Mexican  money  of  the  Islands  should  be  surrendered  and 
new  money  issued  in  lieu  of  it  with  some  fixed  relation  of  value,  and  after 
that  date  it  should  be  unlawful  for  other  money  than  that  provided  in  this 
bill  to  circulate,  and  some  penalty  be  attached  to  its  circulation,  you  might 
have  a  uniformity  of  currency."  Cong.  Rec.,  57th  Cong.,  2nd  Sess., 
XXXV,  Part  2,  pp.  2606-07. 

1  Ordinance  No.  64  of  the  City  of  Manila,  dated  Feb.  5,  1904  and  effective 
March  i. 


330  THE  PHILIPPINE  CURRENCY  REFORM 

Philippine  currency.  A  healthy  competition  began  for 
the  new  currency  trade.  Higgling  over  exchange  rates 
was  reduced,  and  it  was  not  long  before  nearly  all  of  the 
better  stores  and  shops  of  the  city,  and  many  of  the  poorer 
ones,  were  receiving  the  new  Philippine  currency  at  prac- 
tically the  banks'  rates,  with  the  result  that  the  introduc- 
tion of  the  new  currency  in  Manila  was  materially  ac- 
celerated. This  expedient,  however,  was  limited  to  Manila. 

Effect  of  Removing  Legal  Tender  Quality  from  Old  Currency 

The  public  and  the  local  newspapers,  for  some  time  prior 
to  the  end  of  the  year,  held  the  opinion  that  the  death  knell 
of  local  currency  would  be  sounded  when  it  ceased  to  be 
legal  tender  on  December  3I.1  This  popular  opinion,  how- 
ever, as  was  to  be  expected,  was  soon  to  receive  a  rude 
shock.  From  the  beginning  of  the  calendar  year  1903  up 
to  November  each  month  had  witnessed  a  heavy  net  ex- 
portation of  local  currency  from  the  Islands.  In  October, 
the  net  exportations  amounted  to  Pfs.  1,500,000.  In 
November,  however,  the  tide  began  to  turn,  and  between 
November  i  and  February  i  there  was  a  total  commercial 
importation  of  local  currency  into  the  Islands  of  over 
Pfs.  1,250,000  and  a  net  importation  of  over  Pfs.  600,000. 
Nearly  P  800,000  of  the  new  currency  were  withdrawn  from 
circulation  during  December  alone  through  the  sale  of  ex- 
change by  the  Government  on  the  Gold  Standard  Fund  in 
New  York,  while  the  month  of  December  exhibited  an  actual 
decrease  of  over  P  82,000  in  the  new  Philippine  currency 
circulation.  Business  concerns  which  had  been  announcing 
for  some  time  their  intention  to  transfer  their  business  to 
the  new  currency  basis  with  the  opening  of  the  year  1904, 
when  local  currency  should  cease  to  be  legal  tender,  now 
reversed  their  decisions  and  announced  that  they  would 

1  Cf.,  for  example,  editorials  on  Mexican  currency  in  the  Manila  Times 
of  Aug.  18, 1903  and  Dec.  21,  1903. 


WITHDRAWAL  OF  LOCAL  CURRENCY  331 

be  compelled  to  continue  to  use  the  old  currency.1  The 
following  extract  from  an  editorial  entitled  "The  Currency 
Dilemma"  in  the  Manila  Times  of  January  7,  1904  is 
typical. 

"The  ordinary  individual  does  not  profess  to  know  much 
about  the  monetary  system  of  his  country.  He  may  dis- 
tinguish between  an  undeviating  and  a  fluctuating  medium 
of  exchange,  but  to  secure  the  one  and  guard  against  the 
other  has  been  considered  the  work  of  specialists,  those 
who  have  given  the  question  more  than  ordinary  study. 
In  the  hands  of  experts  the  uninitiated  usually  feel  safe. 
So  it  was  with  the  currency  question  in  this  archipelago. 
The  eminent  professors  and  monetary  doctors  naturally 
inspired  confidence  in  the  people  who  had  suffered  much 
from  fluctuating  money.  Relief  was  coming  because 
authority  that  could  not  well  be  questioned  said  it  would 
come.  The  transformation  inaugurated  more  than  half  a 
year  ago  was  to  be  approximately  complete  by  the  first  of 
the  present  year.  The  new  Conant 2  dollar  was  expected  to 
take  the  place  allotted  to  it  by  statute,  while  the  money 
that  had  embarrassed  trade  conditions  would  no  longer  have 
a  place  as  legal  tender.  That  was  all  pleasing  enough  and 
apparently  feasible,  but  what  result  did  the  New  Year 
actually  bring?  It  has  brought  a  realization  of  the  fact 
that  the  Philippine  Islands  are  not  appreciably  nearer  the 
gold  standard  than  they  were  six  months  ago ;  that  the  new 
currency  when  liberated  disappears  as  fast  as  did  any 
other  money  representing  gold;  that  the  amount  of  the 
new  currency  in  circulation  is  infinitesimal  compared  with 
the  amount  necessary  to  the  usual  trade  conditions;  that 
the  old  money  is  still  here  and  becoming  dearer,  and  further 
that  any  person  of  ordinary  intelligence  appears  to  know 

1  Cf .  for  example  the  announcement  of  the  Compania  General  de  Tabacos 
de  Filipinas,  published  in  the  Manila  Times  of  December  31,  1903. 

2  During  the  early  days  the  new  currency  was   popularly  known  as 
"Conant  Currency"  in  contrast  to  "Mex".  .  .  Charles  A.  Conant,  it  will 
be  recalled,  was  the  currency  expert  who  assisted  the  Government  during 
the  early  stages  of  the  formulation  of  the  new  currency  scheme. 


332  THE  PHILIPPINE  CURRENCY  REFORM 

as  much  about  currency  as  an  exact  science  as  those  who 
have  been  employed  for  several  years  to  save  the  archipelago 
from  the  mongrel  money  of  the  old  regime.  ...  It  cer- 
tainly seems  to  a  layman,  that  the  new  currency  system 
of  these  Islands  is  in  a  precarious  condition,  .  .  .  [and]  it 
is  safe  to  predict  a  failure  for  the  new  .  .  .  system  under 
present  methods." 

The  situation  at  the  end  of  the  year  1903  was  certainly 
not  an  encouraging  one.  The  transition  period  in  any  cur- 
rency reform  is  a  period  of  unsettled  business  conditions. 
The  Philippines  were  no  exception  to  this  rule,  and  at  the 
beginning  of  1904  gave  promise  of  being  a  very  unfortunate 
exemplification  of  it.  Business  men  were  anxious  to  have 
the  transition  effected  as  soon  as  possible.  They  were 
heartily  sick  of  the  dual  currency  and  of  the  generally  un- 
settled business  conditions.  At  the  end  of  the  year  the 
prospect  of  an  indefinite  prolongment  of  these  conditions 
was  not  a  pleasant  one.  The  commercial  public,  however, 
dreaded  any  positive  action  on  the  part  of  the  Government 
to  put  an  end  to  these  conditions  much  as  a  patient  dreads 
a  surgical  operation. 

Drastic  Measures  to  Force  Old  Currency  out  of  Circulation 

The  Philippine  Commission,  after  listening  in  a  number 
of  public  sessions  to  the  arguments  of  the  various  com- 
mercial interests  in  the  Islands  —  arguments  which  were 
in  the  main  directed  towards  inducing  the  Commission  to 
redeem  all  local  currency  at  par,  a  course  many  months 
before  definitely  decided  against,  —  came  to  the  opinion 
that  the  business  interests  of  the  Islands  would  in  the 
long  run  suffer  less,  if  some  positive  action  were  taken 
by  the  Government  to  force  the  old  currency  out  of 
circulation  with  certainty  and  a  reasonable  degree  of 
promptness,  than  if  the  existing  unsettled  conditions  were 
permitted  to  dawdle  along  indefinitely.  The  public,  it 


WITHDRAWAL  OF  LOCAL  CURRENCY  333 

was  reasoned,  would  continue  to  use  the  old  currency  so 
long  as  it  was  the  cheaper  one  and  could  be  used  at  a 
profit  in  preference  to  the  new;  and  the  prospects  were 
that  this  condition  of  affairs  would  exist  for  a  long  time 
unless  the  Government  should  adopt  some  positive  meas- 
ures to  bring  it  to  an  end.  A  few  business  concerns  could 
not  well  transfer  their  business  to  the  new  currency  basis 
unless  their  competitors  would  do  the  same  —  in  fact,  as 
we  have  seen,1  efforts  in  this  direction  on  the  part  of  several 
firms  had  signally  failed,  —  and  it  was  felt  that  the  Govern- 
ment alone  was  in  a  position  to  force  them  all  promptly  into 
line. 

To  meet  this  situation  the  Government  adopted  a  num- 
ber of  drastic  measures.  An  Act  was  passed  December 
28,2  providing  that  salaries  of  provincial  and  municipal 
officers  and  employees  should  be  fixed  in  Philippine  cur- 
rency at  the  same  amounts  then  paid  in  local  currency,  and 
that  taxes,  fees,  and  other  public  charges,  including  fines 
and  penalties,  then  payable  in  local  currency  should  be 
made  payable  in  Philippine  currency  on  the  basis  of  one 
Philippine  peso  for  one  local  currency  peso ;  and  that  all 
compensation  for  insular  or  provincial  officers  and  em- 
ployees should  be  payable  in  Philippine  currency,  on  the 
basis  of  one  Philippine  peso  for  one  local  peso,  on  and  after 
the  first  of  January  1904.  By  this  Act  the  Government 
transferred  its  own  business  —  revenues  and  salaries  —  to 
the  new  currency  on  a  par  basis.  Previous  executive 
orders  already  cited3  had  transferred  the  Government's 
contracts  and  purchasing  of  supplies  to  the  new  basis. 

In  the  fall  of  1903  one  of  the  local  banks  notified  its  debt- 
ors that  local  currency  obligations  due  the  bank  at  call  or 
maturing  before  the  end  of  the  year  must  be  paid  be- 
fore January  i  or  renewed  at  par  in  the  new  Philippine 

1  Supra,  pp.  330-31. 

2  Official  Gazette,  Jan.  13,  1904,  p.  17. 
8  Supra,  p.  317. 


334  THE  PHILIPPINE  CURRENCY  REFORM 

currency.  The  writer  was  informed  on  credible  authority 
that,  under  the  depressed  business  conditions  then  pre- 
vailing in  the  Islands,  many  were  unable  to  settle  their 
obligations  before  the  end  of  the  year,  and  were  therefore 
compelled  to  convert  them  at  par,  at  a  loss  expressed  in 
gold  values  of  something  like  10  per  cent. 

On  January  i,  1904  the  Civil  Governor  issued  an  order  1 
providing  for  the  receipt  and  redemption  of  Spanish-Fili- 
pino currency  by  the  Insular  Treasurer  and  the  various 
provincial  treasurers,  until  July  i,  1904,  at  such  official 
rates  as  should  be  fixed  from  time  to  time  by  executive 
order.  The  order  further  directed  that  Spanish-Filipino 
currency  should  be  receivable  by  the  Government  in 
payment  of  all  government  dues  (but  not  redeemable  in 
Philippine  currency)  from  July  i,  1904  to  October  i,  1904, 
after  which  date  it  was  to  cease  to  be  so  receivable  and 
was  to  be  redeemable,  at  the  option  of  the  Government, 
only  at  its  bullion  value  —  a  value  from  8  to  1 1  per  cent 
less  than  the  bullion  value  of  the  Mexican  peso.2  The 
receipt  and  redemption  of  Mexican  pesos  were  officially 
discontinued  January  i,  1904,  according  to  previous 
announcements.  These  coins,  for  which  there  was  a  good 
foreign  demand,  were  left  to  take  care  of  themselves. 

Later  in  January  an  arrangement  was  made  by  the 
Insular  Treasurer  with  the  three  Manila  banks  which  were 
acting  as  depositaries  of  government  funds,  by  which  they 
agreed  to  withdraw  from  circulation  as  far  as  possible  all 
Spanish-Filipino  currency  received  over  their  counters,  and 
to  repay  the  Government  its  local  currency  deposits  solely 
in  the  form  of  Spanish-Filipino  currency,  as  long  as  the 
latter  should  be  available.  Pursuant  to  this  arrangement 
a  resolution  was  passed  by  the  Commission  on  January  28 
to  the  effect  that,  so  long  as  the  Treasurer  was  able  to 

1  Official  Gazette,  Feb.  10, 1904,  pp.  18,    Cf,  also,  Executive  order  No.  29, 
June  21,  1904,  ibid.,  p.  527. 

2  Cf.  supra,  pp.  249-50. 


WITHDRAWAL  OF  LOCAL  CURRENCY  335 

continue  this  arrangement  with  the  banks,  the  various 
provincial  treasurers  were  authorized  to  "receive  Mexican 
dollars  in  exchange  for  Philippine  currency  at  the  author- 
ized rate  of  exchange  between  Spanish-Filipino  coins  and 
Philippine  currency,  and  transmit  the  coins  so  received 
to  the  Insular  Treasury."  This  measure  was  continued  in 
effect  until  July  i,  1904.  The  arrangement  materially 
assisted  the  Government  in  withdrawing  the  Spanish- 
Filipino  coins  from  circulation  and  afforded  the  public 
additional  means  of  disposing  of  their  Mexican  pesos. 

Very  tardily,  on  January  14,  1904,  a  law  was  passed  pro- 
hibiting under  heavy  penalties  "the  importation  into  the 
Philippine  Islands  of  Mexican  currency,  Spanish-Filipino 
currency,  or  any  other  metallic  currency  which  is  not  upon 
a  gold  basis."  l  This  act  was  favorably  received  by  the 
public.  Those  who  viewed  it  superficially  saw  in  it  merely 
a  positive  move  on  the  part  of  the  Government  toward 
the  solution  of  the  vexed  currency  problem.  "The  wiser 
ones"  in  the  banks  and  leading  business  houses  saw  in  it 
a  step  which  inevitably  would  force  the  Government  to 
the  policy,  previously  rejected  but  which  they  so  much 
desired,  of  redeeming  the  old  currency  at  par  in  the  new. 
For  they  saw  that  to  limit  the  supply  of  the  old  currency 
while  it  was  being  retired  would  force  up  its  value,  and, 
since  the  public  would  prefer  it  to  the  new  currency  so  long 
as  it  was  even  slightly  cheaper,  the  result  would  be  to  force 
the  Government  to  redeem  at  par  in  order  to  effect  its 
retirement.2 

1  Act  No.  1042.    Official  Gazette,  Jan.  27,  1904,  pp.  79-80. 

2  The  Manila  Cablenews  of  January  19, 1904  gave  the  following  interview 
as  "  substantially  the  words  of  one  of  the  major  members  of  a  banking  firm 
when  asked  what  he  thought  the  outcome  of  the  currency  situation  within 
the  next  few  weeks  would  be :" 

"Mex.  will  go  to  two  for  erne  [i.e.,  Pfs.  2  for  $i]  in  a  short  time,  and  people 
will  be  fairly  breaking  their  necks  to  get  any  of  it  at  almost  any  price.  There 
are  at  least  eight  millions  of  the  precious  stuff  buried  in  the  Islands  here.  It 
has  got  to  come  out.  All  the  legislation  the  Commission  can  do  won't  stop 
it.  Somebody  is  going  to  make  a  mint  of  money.  Do  you  think  the  bankers 


336  THE  PHILIPPINE   CURRENCY  REFORM 

Taxation  of  the  Use  of  Local  Currency.  The  Govern- 
ment, on  the  other  hand,  contemplated  no  such  result. 
The  Act  prohibiting  the  importation  of  local  currency  was 
only  part  of  a  larger  plan  which  the  Government  had  been 
carefully  formulating  and  which  involved  a  much  more 
vigorous  step.  This  was  the  placing  of  prohibitive  taxes 
upon  the  use  of  local  currency  after  a  period  of  eight  months 
time.  When  this  part  of  the  plan  came  to  light  there  was 
a  storm  of  protest.1  At  the  public  hearings  which  the 
Commission  held  on  the  subject  the  members  of  the  bank- 
ing and  business  community  were  nearly  all  strong  in 
their  denunciation  of  such  "  drastic  and  dangerous  legis- 
lation" as  that  proposed.  The  Spanish  Chamber  of 
Commerce,  the  Chinese  Chamber  of  Commerce,  and  the 
Filipino  Chamber  of  Commerce,  all  passed  resolutions 
against  the  proposed  legislation  and  favoring  the  retire- 
ment of  the  old  currency  on  a  two  for  one  basis.2  The 
American  Chamber  of  Commerce  after  a  spirited  debate 
passed  a  resolution  favorable  to  the  proposed  legislation, 
but  suggesting  certain  modifications.3  "  It  was  apparent," 
said  The  Manila  Cablenews,  in  its  issue  of  January  22, 
1904,  referring  to  the  meeting  of  the  American  Chamber  of 

are  fools  to  let  such  a  chance  escape  them  ?  I  tell  you  the  banks  are  loaded 
up  with  Mex.,  and  they  will  exact  payment  in  full  in  that  currency.  The 
Commission  has  forbidden  the  importation  of  any  more  of  the  coins,  except 
what  is  already  on  the  way,  and  the  people  are  already  clamoring  for  more 
than  they  can  get.  Already  there  is  not  enough  of  the  currency  to  do 
business  properly  on  and  yet  you  do  not  see  the  Conants  in  circulation  very 
much.  The  people  want  Mex.  now,  but  they  will  want  it  very  much  worse 
before  they  can  pay  the  hundreds  of  thousands  of  dollars  loans  they  have 
outstanding  with  the  banks.  Mex.  is  2.10  to-day,  but  the  result  of  this 
forcing  process  which  the  banks  were  foresighted  enough  to  perceive  before 
the  prohibition  bill  was  even  thought  of  by  the  Commission,  will  simply  be 
that  it  will  go  back  to  two  for  one  in  a  very  short  time,  and  I  am  not  saying 
but  that  it  may  go  even  higher  than  that.  It  depends  somewhat  on  local 
conditions,  but  you  can  be  safe  in  saying  it  will  go  to  two  for  one." 

1  Cf.  Manila  newspapers  of  Jan.  21  to  24,  1904. 

8  Cf.  The  Manila  Cablenews,  Jan.  22,  1904. 

*  Cf.  The  Manila  American,  Jan.  21,  1904. 


WITHDRAWAL  OF  LOCAL  CURRENCY  337 

Commerce,  "that  the  consensus  of  opinion  among  the 
commercial  men  present  at  the  currency  session  yester- 
day was  strongly  opposed  to  the  passage  of  the  proposed 
Act  imposing  taxes  on  contracts,  etc.  made  in  Mexican 
currency.  ..." 

Despite  the  opposition  the  Philippine  Commission  stood 
firm.  It  gave  the  appearance  of  making  a  few  concessions 
by  reducing  the  rates  of  the  proposed  taxes,  but,  inasmuch 
as  the  reductions  left  the  rates  all  absolutely  prohibitive, 
the  concessions  were  only  nominal. 

On  January  27  the  Local  Currency  Taxation  Act1  was 
passed.  It  is  one  of  the  most  striking  pieces  of  currency 
legislation  in  modern  currency  history.  The  title  declared 
it  to  be  "an  act  for  the  purpose  of  providing  revenue  [sic] 

and  of  maintaining  the  parity  of  the  Philippine  currency " 

It  imposed  an  ad  valorem  tax  on  contracts  or  other  instru- 
ments payable  in  local  currency  negotiated  after  Septem- 
ber 30,  1904,  and  upon  local  currency  bank  deposits  main- 
tained after  December  31,  1904,  and  exacted  a  special 
license  tax  of  all  merchants  doing  business  in  local  currency 
after  the  latter  date.  The  tax  rates  were  extremely  high 
and  some  of  them  increased  automatically  with  time.  For 
example,  the  ad  valorem  rates  on  checks,  notes,  drafts, 
bonds,  bills  of  exchange,  and  other  contracts  payable  wholly 
or  in  part  in  local  currency  were  as  follows :  i  per  cent 
if  the  contract  was  made  during  the  month  of  October, 
2  per  cent  if  made  during  November,  3  per  cent  if 
made  during  December,  and  5  per  cent  if  made  after 
December  31,  1904.  A  transfer  of  ownership  of  such  docu- 
ments after  September  30,  1904  was  to  "be  considered  a 
separate  and  distinct  contract,"  and  as  such  to  be  subject 
to  the  tax.  The  tax  rate  upon  local  currency  bank  deposits 
held  after  December  31,  1904  was  i  per  cent  a  month, 
payable  quarterly.  In  order  to  reach  those  who  did  not 
make  written  contracts  nor  keep  bank  accounts,  the  law 
1  Act  No.  1045.  Official  Gazette,  Feb.  10,  1904,  pp.  105-107. 


338  THE  PHILIPPINE  CURRENCY  REFORM 

required  "all  persons,  firms,  or  corporations  who  engage 
in  any  business  whatsoever  in  the  Philippine  Islands,  after 
December  31,  1904,  and  make  use  of  local  currency  to  any 
extent  whatever  in  either  buying,  selling,  or  renting  goods, 
property,  or  services"  to  obtain  a  special  license  from  the 
Collector  of  Internal  Revenue,  in  addition  to  the  other 
licenses  then  required  by  law.  The  license  rates  were 
those  of  the  old  Spanish  industrial  tax  law  which  had 
been  repealed  by  the  Philippine  Commission.  They 
varied  with  the  size  of  the  city  from  500  pesos  to  5000  pesos, 
the  rate  in  Manila  being  5000  pesos  annually.  The  penal- 
ties for  failure  to  comply  with  the  Act  were  severe.  One 
member  of  the  Philippine  Commission  characterized  the 
law  as  being  "horse  high,  bull  strong,  and  pig  tight." 
Many  opponents  of  the  measure  thought  the  Act  was  so 
drastic  that  the  Government  must  be  bluffing.  They  were 
mistaken. 

As  a  matter  of  fact  the  Act  was  not  for  two  reasons 
so  drastic  as  it  appeared,  (i)  The  first  and  most  im- 
portant was  that  the  taxation  provisions  did  not  begin  to 
become  operative  for  over  eight  months,  i.e.,  until  October  i ; 
and  the  law  did  not  go  into  full  effect  until  January  i,  1905. 
The  public  were  thus  given  ample  time  in  which  to  "  set  their 
houses  in  order."  If  they  did  not  do  so  they  had  no  one 
to  blame  but  themselves.  (2)  The  second  reason  was  that 
numerous  exceptions  were  made  for  the  protection  of  per- 
sons having  contracts  previously  made  and  payable  in 
local  currency,  and  of  persons  wishing  to  dispose  of  local 
currency  by  exportation,  sale  to  the  Government,  or  other 
similar  means.  Bank  deposits  were  exempted  from  the 
tax  when  maintained  for  the  purpose  of  meeting  local  cur- 
rency contracts  made  and  properly  registered  with  the 
Collector  of  Internal  Revenue  prior  to  January  i,  1905. 
There  were  careful  provisions  in  the  law  to  secure  the 
equitable  adjustment  of  contracts  previously  made  calling 
for  payment  in  local  currency  and  maturing  after  that 


WITHDRAWAL  OF  LOCAL  CURRENCY  339 

currency  should  cease  to  circulate.  Among  the  latter 
provisions  there  was  a  somewhat  unique  one,  drafted  by 
the  Secretary  of  Finance  and  Justice,  Henry  C.  Ide,  that 
merits  description. 

The  Philippine  Government  apparently  had  no  legal 
right  in  its  currency  legislation  to  impair  directly  the  obli- 
gation of  past  contracts  by  denying  the  legal  tender  quality 
to  local  currency  for  the  payment  of  contracts  made  at 
the  time  when  that  currency  was  unlimited  legal  tender. 
Section  3  of  the  Philippine  Coinage  Act  of  Congress  con- 
tained a  proviso  that  "  debts  contracted  prior  to  the  thirty- 
first  day  of  December,  nineteen  hundred  and  three,  may  be 
paid  in  the  legal  tender  currency  of  said  Islands  existing 
at  the  time  of  the  making  of  said  contracts,  unless  other- 
wise expressly  provided  by  contract."  The  Philippine 
Government  was  now  taking  action  to  force  all  this  old 
currency  out  of  circulation,  and  it  wished  persons  having 
such  contracts  to  commute  them  to  the  new  currency  basis 
at  equitable  rates  of  adjustment.  To  this  end  the  Local 
Currency  Taxation  Act  (sec.  3)  provided  that  in  the  case  of 
such  contracts  the  debtor  might  tender  to  the  creditor  in 
lieu  of  the  local  currency  called  for  in  the  contract,  "the 
just  amount  due  thereon  in  [the  new]  Philippine  pesos" 
computed  in  a  manner  described.  But  if  the  creditor  should 
refuse  to  accept  payment  on  such  a  basis,  and  the  right 
of  the  creditor  should  be  established  in  the  court,  the  court 
was  directed  to  render  judgment  for  the  creditor  "to  re- 
cover as  damages  the  lawful  sum  due  to  him,  in  Philippine 
pesos,  instead  of  in  the  currency  mentioned  in  the  con- 
tract .  .  . ",  the  rate  of  equivalence  being  computed  in  the 
same  manner  as  it  would  have  been  computed  had  a  vol- 
untary commutation  been  made,  according  to  law,  between 
the  debtor  and  creditor.1 

1  For  the  purpose  of  computing  the  just  equivalence,  evidence  was  to  be 
taken  "as  to  the  real  and  just  value  in  Philippine  currency  of  the  currency 
named  in  the  contract,  .  .  .  including  evidence  of  the  local  market  value  of 


340  THE  PHILIPPINE   CURRENCY  REFORM 

Immediately  upon  the  passage  of  the  Local  Currency 
Taxation  Act,  an  announcement  was  prepared  by  the  Chief 
of  the  Division  of  the  Currency  explaining  briefly  and  in 
simple  language  the  provisions  of  existing  laws  with  refer- 
ence to  local  currency  and  urging  the  public  to  exchange 
their  local  currency  for  the  new  Philippine  currency  as 
rapidly  as  possible.  This  announcement  was  prepared  in 
21  different  languages  and  dialects,  and  nearly  100,000 
copies  were  posted  throughout  the  Islands.  It  was  also 
widely  announced  by  bandillo  or  "town  crier."  A  second 
announcement  to  the  same  effect  was  made  in  November, 
about  120,000  copies  of  which,  in  the  various  languages 
and  dialects,  were  posted. 

On  June  30,  pursuant  to  the  executive  order  of  January 
i  previously  referred  to,1  the  Government  discontinued  the 
redemption  of  local  currency  as  money,  and  on  September 
30  discontinued  receiving  it  in  payment  of  government 
dues.  On  September  29  an  executive  order 2  was  issued 
directing  the  Insular  Treasurer  and  each  provincial  treasurer 
in  the  Islands  to  purchase,  from  October  i,  1904  to  January 
i,  1905,  Spanish-Filipino  coins,  Mexican  pesos,  Chinese  sub- 
sidiary silver  coins,  and  foreign  copper  coins,  at  official  rates 
to  be  announced  from  time  to  time  by  the  Civil  Governor 
based  upon  the  bullion  value  of  the  Spanish-Filipino  coins. 

The  provisions  of  this  order  were  extended  from  time  to 
time  after  January  i,  1905  until  July  i,  1907,  when  practi- 
cally all  the  local  currency  was  believed  to  have  been 
withdrawn  from  circulation.3  Spanish-Filipino  currency, 

such  currency,  its  value  in  neighboring  countries  as  currency,  its  value  in  the 
great  markets  of  the  world,  its  bullion  value,  and  any  other  facts  necessary  to 
determine  its  true  value."  Sec.  3  of  Act. 

For  subsequent  judicial  applications  of  these  provisions  of  the  Act  by  the 
Philippine  Supreme  Court,  see  Official  Gazette,  1910,  pp.  414-15  and  716. 

1  Supra,  p.  334. 

2  Executive  Order  No.  39.    Executive  Orders  and  Proclamations  Issued 
by  the  Civil  Governor  during  the  Year  1904,  pp.  83-85. 

8  Executive  Order  No.  8,  March  n,  1907.  Official  Gazette,  1907,  p.  190. 
Cf.  Ann.  Rep.  Treas.  Phil.  Islands,  1912,  p.  33. 


WITHDRAWAL  OF  LOCAL  CURRENCY  341 

although  from  8  to  n  per  cent  lighter  than  Mexican 
currency,  prior  to  the  time  of  the  above  order  had  always 
circulated  at  par  with  the  Mexican  currency.1  Shortly 
after  the  issuance  of  this  order,  however,  as  had  been 
expected,  the  market  values  of  the  two  kinds  of  cur- 
rencies separated,  that  of  the  Mexican  currency  being 
thenceforth  determined  by  its  value  for  exportation,  and 
that  of  the  Spanish-Filipino  currency  by  the  Government's 
official  rate  for  its  purchase  as  bullion. 

Prior  to  October  i,  1904  contracts  to  the  amount  of 
about  7,400,000  pesos,  local  currency,  exclusive  of  Govern- 
ment accounts,  were  registered  at  the  office  of  the  Col- 
lector of  Internal  Revenue,  and  exempted  from  the  pay- 
ment of  the  local  currency  tax.  Of  this  amount  about 
Pfs.  1,800,000  represented  bank  deposits,  and  about  Pfs. 
3,500,000  insurance  policies,  payable  in  local  currency. 
The  total  number  of  exemptions  issued  was  684.2 

Contrary  to  the  almost  unanimous  expectation  of  local 
bankers  and  business  men,  the  law  providing  for  the  taxa- 
tion of  local  currency  transactions  proved  a  remarkable 
success.  The  dates  upon  which  the  various  taxes  imposed 
by  the  law  were  to  become  effective  were  so  far  distant 
that  the  law  had  little  immediate  effect.  The  bulk  of  the 
Islands'  business  continued  as  before  to  be  transacted  in 
local  currency.  From  January  27,  the  date  of  the  passage 
of  the  Local  Currency  Taxation  Act,  until  June  the  value  of 
the  Mexican  peso  in  Manila,  as  measured  by  sterling  ex- 
change rates,  was  for  over  four  fifths  of  the  time  above  the 
value  of  its  silver  content  in  London  and  above  the  value 
of  Hongkong  currency.  During  the  latter  part  of  April, 
the  month  of  May,  and  the  fore  part  of  June,  the  differences 
in  these  values  were  marked,  the  local  value  varying  during 
most  of  this  period  between  7  and  9  per  cent  above  bullion 
value,  and  about  the  same  amount  above  sterling  exchange 

1  Cf.  supra,  pp.  250-51. 

8  Second  Ann.  Rep.  Chief  Div.  Curr.,  p.  14. 


342  THE  PHILIPPINE  CURRENCY  REFORM 

rates  in  Hongkong.1  Early  in  June,  however,  business 
men  began  in  earnest  to  adjust  their  affairs  to  the  law, 
and  it  was  surprising  to  every  one,  to  see  in  how  short  a 
time  the  adjustment  was  accomplished,  and  with  what 
little  disturbance  to  business.  There  never  was  a  better 
example  of  the  adage,  "to  be  forewarned  is  to  be  fore- 
armed." From  June  9  to  June  15  sterling  exchange  rates 
in  Manila  declined  nearly  5^  per  cent  —  a  variation  great 
in  itself,  but  not  at  all  uncommon  in  silver  standard  coun- 
tries —  whereas  in  Hongkong  the  decline  during  the  same 
period  was  less  than  one  third  of  i  per  cent.  The  London 
price  of  silver  for  both  dates  was  the  same.  This  decline 
was  the  first  sign  of  any  important  influence  upon  exchange 
rates  being  exerted  by  the  taxation  measures  which  were 
soon  to  go  into  effect.  Sterling  exchange  rates  in  Manila, 
nevertheless,  continued  above  the  rates  in  Hongkong  until 
about  the  2d  of  July.  It  was  not  until  the  27th  of  June 
that  the  value  of  the  Mexican  dollar  in  Manila  fell  below 
the  value  of  its  silver  content  in  London.  From  January  to 
June  the  net  commercial  exportations  of  local  currency  from 
the  Islands  were  but  171,000  pesos,  in  April  and  May  they 
were  but  2100  pesos,  in  June  55,000  pesos.  In  July,  how- 
ever, they  increased  to  837,000  pesos,  and  for  the  remainder 
of  the  calendar  year  they  amounted  to  over  5,000,000  pesos. 
About  the  middle  of  June  the  members  of  the  Manila 
Chamber  of  Commerce  passed  resolutions  in  favor  of  trans- 
ferring their  businesses  to  a  Philippine  currency  basis  on 
the  ist  of  July,  and  the  Chinese  Chamber  of  Commerce 
shortly  afterwards  adopted  similar  resolutions.  By  the 
latter  part  of  July  the  banks  had  practically  discontinued 
making  forward  exchange  contracts  in  local  currency,  and 
comparatively  few  ready  transactions  in  that  currency 
were  then  being  made.  Before  August  i  the  great  bulk 
of  the  foreign  exchange  business  of  the  Islands  had 
been  transferred  to  the  new  currency  basis.  Between 
1  Ibid,  p.  28.  Cf.  also  chart,  supra,  p.  251. 


WITHDRAWAL  Or  LOCAL  CURRENCY  343 

August  31  and  December  31  the  total  local  currency 
current-account  credit  balances  (exclusive  of  Government 
balances)  of  the  five  Manila  banks  fell  from  1,814,474  pesos 
to  729  pesos.  By  September  30,  the  date  upon  which  the 
taxation  of  local  currency  transactions  began  to  go  into 
operation,  most  of  the  larger  trade  of  the  Islands  was 
being  carried  on  in  Philippine  currency,  and  the  same 
was  true  of  the  better  class  of  retail  trade.  The  small 
transactions  of  the  Chinese  and  native  shops  and  of  the 
markets  still  continued  to  be  almost  entirely  in  local  cur- 
rency. 

With  the  beginning  of  the  new  year  the  Collector  of 
Internal  Revenue,  in  whose  hands  the  administration  of  the 
Local  Currency  Taxation  Law  was  placed,  issued  circulars 
to  his  deputies  throughout  the  Islands  enjoining  the  rigid 
enforcement  of  the  law.  The  circulation  of  local  currency 
among  the  small  trades-people  quickly  ceased;  thousands 
of  natives  and  Chinese  flocked  to  the  insular  treasury  and 
the  various  provincial  treasuries  for  the  exchange  of  their 
old  currency.  The  exchanges  made  by  the  Government 
during  December,  January,  and  February,  amounted  to 
several  millions  of  pesos,  a  large  proportion  of  which  was 
composed  of  subsidiary  and  minor  coins,  the  denomina- 
tions naturally  last  to  be  presented  for  redemption. 

On  February  2,  1905  the  Collector  of  Internal  Revenue 
sent  a  circular  letter  to  all  the  provincial  treasurers  in  the 
Islands,  inquiring  to  what  extent  local  currency  was  being 
used  in  the  business  of  the  respective  provinces,  and  to 
what  extent  it  was  being  held  for  speculative  purposes.  Re- 
ports received  from  thirty-four  provinces  showed  that  in  all 
but  three  provinces  local  currency  had  practically  ceased 
to  be  used  except  to  a  small  extent  in  a  few  of  the  more  re- 
mote parts  of  the  interior,  and  that  almost  none  was  being 
held  for  speculative  purposes.  Of  the  three  provinces 
excepted,  the  estimated  circulation  in  two  of  them  was  but 
135,000  pesos,  while  for  the  third  one,  a  remote  province 


344  THE  PHILIPPINE   CURRENCY  REFORM 

of  little  commercial  importance,  no  estimate  was  made. 
After  January  1905  local  currency  ceased  to  be  a  factor  in 
the  trade  of  the  Islands  except  to  a  small  extent  in  a  few 
very  remote  districts.  Only  three  persons  were  prosecuted 
for  the  infraction  of  the  Local  Currency  Taxation  Law,  and 
all  three  cases  were  of  minor  importance. 

Effect  of  the  Reform  on  Prices 

An  important  question  to  be  asked  in  connection  with  any 
currency  reform  is,  What  was  its  effect  upon  prices  ?  Unfor- 
tunately, the  absence  of  any  carefully  prepared  price  statis- 
tics in  the  Philippines  renders  a  safe  judgment  upon  this 
question  impossible.  What  evidence  there  is  seems  to  show 
that  the  immediate  tendency  of  the  change  was  to  give  the 
new  peso  no  higher  purchasing  power  as  regards  retail  prices 
and  wages  than  the  old,  and  thus  to  increase  prices  and 
wages,  as  measured  in  gold  values,  by  the  difference  between 
the  gold  value  of  the  new  monetary  unit  and  that  of  the  old.1 
This  tendency  apparently  did  not  apply  to  anything  like 
the  same  extent  in  the  case  of  wholesale  prices,  with  ref- 
erence to  which  competition  was  much  keener.  Under  the 
old  currency  regime  the  purchasing  power  of  the  local 
peso  in  local  retail  trade  was  not  to  any  extent  altered  by 
short-time  fluctuations  in  the  value  of  its  fine  silver  con- 
tent. A  Mexican  peso  would  ordinarily  purchase  as  much 
in  the  local  retail  markets  when  its  bullion  value  was  forty 
cents,  United  States  currency,  as  when  it  was  forty-five  or 
fifty  cents.  It  has  previously  been  noted  that  at  the  be- 
ginning the  new  peso  was  generally  accepted  by  local  trades- 
men only  at  the  same  value  as  the  old.  As  the  new  money 
worked  its  way  into  more  general  circulation,  however, 
merchants  in  Manila  and  other  cities  of  the  Islands  came 

1  In  this  respect  the  experience  of  the  Philippines  seems  to  have  been 
similar  to  the  recent  experience  of  Porto  Rico  already  discussed.  Supra, 
pp.  213-23. 


WITHDRAWAL  OF  LOCAL  CURRENCY  345 

more  and  more  to  allow  a  premium  on  the  new  currency, 
varying  in  amount  up  to  the  banks'  purchasing  rate  for 
the  same  as  a  maximum.  Later,  when  the  new  money  came 
to  constitute  the  main  part  of  the  circulating  medium, 
prices  seem  to  have  been  transferred  quite  generally  from 
the  old  currency  to  the  new  without  any  material  alter- 
ations, and  in  that  case  local  currency,  when  received  at 
all,  was  received  at  a  discount.  It  should  be  added,  more- 
over, that,  at  the  time  this  influence  was  making  itself  felt 
in  the  direction  of  an  advance  in  prices  and  wages,  the  tend- 
ency of  local  prices  appears  to  have  been  downward. 

Results  Summarized 

The  results  accomplished  down  to  the  spring  of  1905 
may  briefly  be  summarized  as  follows.  For  the  twenty 
months  from  August  i,  1903  to  April  i,  1905  there  was 
a  net  exportation  of  local  currency  from  the  Islands  amount- 
ing to  approximately  26,000,000  pesos,1  about  12,000,000 
of  which  were  commercial  exportations,  and  14,000,000 
government  shipments  for  the  purpose  of  recoinage.  The 
first  shipment  of  local  currency  by  the  Government  for  re- 
coinage  was  made  in  November  1903.  The  new  currency, 
as  previously  stated,  began  to  be  placed  in  circulation  the 
latter  part  of  July  1903.  The  circulation,  as  estimated 
by  the  writer,  at  the  end  of  each  quarter  from  the  passage 
of  the  Gold  Standard  Act  to  April  i,  1905  was  as  follows : 

Pesos. 

December  31,  1903 3,910,000 

March  31,  1904 7,402,000 

June  30,  1904 9,057,000 

September  30,  1904 14,254,000 

December  31,  1904 20,766,000 

March  31,  1905 27,045,000* 

1  From  January  i,  1903  to  August  i,  1903  there  was  a  net  commercial 
exportation  of  about  11,400,000  pesos. 

2  The  note  issue  of  the  Spanish-Filipino  Bank,  amounting  to  between  a 
million  and  a  half  and  two  million  pesos,  was  during  the  same  period,  January 
1904  to  March  1905,  transferred  to  a  Philippine  currency  basis. 


346  THE  PHILIPPINE  CURRENCY  REFORM 

By  April  i  local  currency  had  been  practically  elimi- 
nated from  circulation,  and  the  Islands  were  firmly  es- 
tablished upon  a  gold  basis.  In  other  words,  with  the 
exception  of  the  small  amount  of  United  States  currency  in 
circulation,  practically  the  entire  currency  of  the  country 
was  transformed  in  a  little  over  a  year  and  a  half's  time, 
and  that  without  serious  derangement  of  business  and 
probably  with  no  greater  disturbance  to  prices  than  fre- 
quently occurred  under  the  pre-existing  silver  standard 
as  the  result  of  fluctuations  in  the  value  of  silver.  Every 
one  was  relieved  that  the  reform  had  been  so  quickly  and 
so  successfully  accomplished;  and  prospects  were  bright 
for  a  long  period  of  freedom  from  currency  disturbances. 
Very  soon,  however,  a  new  difficulty  appeared,  growing 
out  of  the  startlingly  rapid  rise  in  the  price  of  silver. 


CHAPTER  VII 

DANGER  TO  THE  NEW  CURRENCY  FROM  THE  RISE  IN 

THE    PRICE  OF  SILVER1 

FROM  1872  until  1903  the  gold  price  of  silver  had  tended 
strongly  downward  —  a  fact  made  familiar  to  all  by  the 
bimetallic  controversy.  The  average  annual  price  of 
British  standard  silver  in  London  fell  from  6&fcd.  per 
ounce  (a  ratio  with  gold  of  15.63  to  i)  in  1872  to 
24-fd.  (a  ratio  of  38.10  to  i)  in  1903,  a  decline  having 
taken  place  in  twenty- two  of  the  thirty-one  years.  In 
only  one  month,  October  1900,  the  time  of  the  adjustment 
of  the  Boxer  troubles  in  China,  had  silver  been  above  30^. 
since  November  1896^  and  the  opinion  had  become  quite 
general  that  silver  had  "come  down  to  stay."  There  was 
much  talk  of  the  probabilities  of  a  further  decline;  very 
little  of  the  probabilities  of  a  rise.  The  Mexican  Com- 
mission on  International  Exchange,  treating  the  subject  of 
silver  in  one  of  a  series  of  valuable  papers  submitted  to  the 
British  Commission  in  June  1903,*  said,  after  outlining 

1  The  next  sixteen  pages  of  this  paper  are  based  largely  upon  an  article 
by  the  author  on  The  Recent  Rise  in  the  Price  of  Silver  and  Some  of  its 
Monetary  Consequences,  published  in  the  Quarterly  Journal  of  Economics 
for  February  1912,  pp.  215-74.     It  is  used  with  the  permission  of  the  pub- 
lishers, for  which  grateful  acknowledgment  is  made. 

2  The  figures  for  the  price  of  silver  are  those  for  British  standard  silver  in 
London  as  given  in  the  annual  circulars  of  Pixley  and  Abell,  bullion  brokers, 
London. 

For  a  brief  general  history  of  silver  the  reader  is  referred  to  Paul  George, 
Die  Bewegung  des  Silberpreises  seit  1873. 

3  The  papers  are  given  in  English  in  the  1903  Report  of  the  Commis- 
sion on  International  Exchange,  on  Stability  of  International  Exchange,  pp. 
173-96. 

347 


348  THE  PHILIPPINE  CURRENCY  REFORM 

the  more  important  events  in  the  recent  history  of  silver : 
".  .  .  All  of  these  events  have  made  such  a  deep  moral 
impression  that  at  present  silver  is  a  subject  of  very  little 
or  no  importance  whatever  to  the  business  community  of 
the  two  continents,  and  it  is  almost  a  disagreeable  topic 
of  conversation."  l 

A  glance  at  the  chart  on  page  353  will  show  the  move- 
ment of  the  price  of  silver  by  months  for  the  period  from 
September  1904  to  December  1907  inclusive. 

The  average  annual  price,  which  was  24^^.  in  1902, 
rose  to  24%d.  in  1903,  26fd.  in  1904,  2'j^d.  in  1905,  and 
$o%d.  in  1906.  Silver  reached  3ojd.  an  ounce  in  November 
1905,  for  the  first  time  since  October  1896,  while  the  high 
price  of  November  1906,  i.e.,  33^.,  was  the  highest  price 
between  October  1893  and  April  191 6. 2  For  the  period 
1903  to  1906  inclusive  the  range  was  52.7  per  cent,  that 
is,  from  2i^d.  (January  1903)  to  33^.  (November  1906). 
The  low  point  in  the  price  of  silver  having  been  reached 
about  the  end  of  1902,  the  upward  movement  began  the 
fore  part  of  1903,  continuing,  although  with  frequent  in- 
terruptions, until  November  1906.  A  high  level  was 
then  maintained  until  the  great  slump  in  the  autumn  and 
early  winter  of  I907.3 

With  the  causes  of  this  great  and  unprecedented  rise  in 
the  price  of  silver  we  are  not  here  concerned.  The  reader 
interested  in  that  subject  will  find  it  discussed  in  some 
detail  in  the  author's  article,  above  cited,  on  The  Recent 
Rise  in  the  Price  of  Silver  and  Some  of  Its  Monetary  Con- 
sequences* 

1  Ibid.,  p.  190. 

2  Figures  here  cited  for  the  high  and  low  prices  were  taken  from  the  Pixley 
and  Abell  circulars ;  those  for  monthly  averages  were  taken  from  the  United 
States  Director  of  the  Mint  Reports. 

8  During  the  fore  part  of  1916,  as  this  book  is  going  to  press,  a  pronounced 
rise  in  the  price  of  silver  is  taking  place.  Silver  reached  the  high  point  of 

.  on  May  3. 
4  Pages  220-39. 


DANGER  TO  THE  NEW  CURRENCY        349 

At  the  price  of  29^.  per  ounce  for  British  standard  silver 
(and  64-5-  cents  for  fine  silver  in  the  United  States)  the  newly 
introduced  Philippine  pesos,  likewise  the  new  subsidiary 
coins,  would  have  reached  their  bullion  par  and  conse- 
quently have  been  in  danger  of  the  melting  pot.  The 
weight  assigned  to  the  peso  in  the  bill  prepared  by  the 
Philippine  Commission  with  the  assistance  of  Mr.  Conant 
and  introduced  in  both  houses  of  Congress,  January  7, 
1902,  had  been  385.8  grains  of  silver  .835  fine.1  That 
peso,  having  a  fine  silver  content  about  14  per  cent  less 
than  the  one  later  authorized,  would  have  had  a  bullion 
par  of  34^.  per  ounce  for  British  standard  silver  in  London, 
and  consequently  would  not  have  reached  the  melting  point, 
since  the  highest  price  reached  was  33!^.  per  ounce,  in 
November  1906.  At  the  average  price  of  silver  for  Janu- 
ary 1902  the  385.8  grain  peso  of  the  original  bill  would 
have  been  worth  as  bullion  41  cents;  but  a  year  later  its 
average  bullion  value  for  January  would  have  been  only 
35.2  cents;  2  and  this  appeared  to  give  too  great  a  margin 
between  bullion  value  and  money  value,  especially  since 
the  tendency  of  the  price  of  silver  seemed  to  be  strongly 
downward.  Accordingly,  the  Senate  Committee  increased 
the  weight  of  the  peso  to  416  grains  and  the  fineness  to 
.900.  By  January  1903  silver  had  fallen  so  far  that  the 
average  price  gave  this  416  grain  peso  a  bullion  value  about 
8  per  cent  less  than  that  of  the  lighter  weight  peso  of  the 
original  bill  a  year  before.3  The  margin  between  the  bul- 
lion value  and  the  money  value  of  the  416  grain  peso,  at 
the  average  price  of  silver  for  February,4  was  about  32.4 
per  cent,  which  to  most  people  seemed  to  be  a  generous 
margin  of  safety. 

1  Cf.  supra,  pp.  308-309. 

2  Cf.  supra,  p.  251. 

3  Cf.  supra,  pp.  308-309. 

4  The  Philippine  Coinage  Act  was  passed  March  2,  1903. 


350  THE  PHILIPPINE  CURRENCY  REFORM 

Export  Point  of  New  Silver  Coins 

When  it  is  said  that  the  bullion  par  of'the  new  peso  was 
.  per  ounce  for  silver  in  London,  it  does  not  mean 
that  at  this  price  Philippine  silver  coins  would  have  been 
melted  and  exported.  To  find  the  actual  export  point  a 
number  of  other  factors,  all  of  them  more  or  less  variable, 
need  to  be  taken  into  account.  The  chief  of  these  were 
the  following. 

(1)  The  destination  of  the  silver.     If  it  were  London, 
the  silver  could  not  be  laid  down  there  normally  in  less  than 
forty  days  from  the  date  of  shipment,  while  actual  de- 
livery could  not  be  made  for  several  days  more,  because 
of  the  time  required  for  smelting,  refining,  and  putting  into 
bars.     If  the  silver  were  to  be  shipped  to  London,  there- 
fore, the  determining  rate  would  not  be  the  prompt  price, 
but  the  price  for  forward  delivery.     If,  on  the  other  hand, 
it  were  to  be  used  as  bullion  in  Hongkong,  and  did  not 
require  first  to  be  shipped  to  London,  it  might  bring  a  price 
as  bullion  higher  than  the  prompt  price  in  London  by  an 
amount   sufficient   to   cover   the   difference  between   the 
expenses  of  shipping  (inclusive  of  interest)  from  London 
to  Hongkong,  and  those  from  Manila  to  Hongkong. 

(2)  The  expense  of  shipping.     Silver  coins  to  be  exported 
must  be  sorted,  boxed,  insured,  carted,  shipped,  unloaded, 
and  delivered.     In  some  instances  brokerage  commissions 
must  be  paid.     The  total  expense  of  shipment  cannot  be 
stated  exactly,  because  it  varies  from  time  to  time,  and 
because  banks  frequently  have  special  contract  rates  for 
shipping   treasure.     One  per   cent  was  probably   a   safe 
computation  at  the  time  for  such  expenses  on  substantial 
shipments  to  London,  and  J  of  one  per  cent  on  such  ship- 
ments to  Hongkong. 

(3)  Exchange.     If  exchange  on  the  place  of  destination 
were  low,  the  exporter  of  silver  would  receive  an  addi- 
tional profit;    if  it  were  high,  his  profit  would  be  dimin- 


DANGER  TO  THE  NEW  CURRENCY       351 

ished.  An  important  element  in  the  quoted  rate  of  ex- 
change in  a  country  so  distant  from  the  great  fi  ancial 
centers  of  the  world  as  the  Philippines  is  the  item  of  interest. 

(4)  Metallurgical  expenses.  These  included  the  expenses 
of  melting,  refining,  alloying,  and  putting  into  bars. 

There  were  in  addition  numerous  other  factors  which 
had  to  be  taken  into  account,  as,  for  example,  the  abrasion 
of  the  coins  (a  very  small  item  in  this  instance),  the  firm- 
ness of  the  silver  market,  and  the  method  of  payment  at  the 
place  of  destination. 

Taking  all  of  these  factors  into  consideration,  it  seemed 
improbable  that  the  shipment  of  Philippine  silver  coins 
to  London  as  bullion  would  become  profitable  before  for- 
ward silver  (sixty  days)  reached  30^  to  30^.  It  was  to 
be  considered,  however,  that  circumstances  might  exist 
such  as  to  make  shipping  profitable  even  below  30^. 

There  was  another  important  phase  of  the  problem, 
however,  which  does  not  appear  to  have  been  generally 
understood.  It  was  the  possibility  that  Philippine  coins 
might  be  exported  not  as  bullion  but  as  money  —  a  pos- 
sibility which  became  a  reality  the  following  year.1 

The  circulating  medium  of  Hongkong,  Shanghai, 
Tientsin,  Pekin,  and  other  oriental  cities  contained  many 
different  kinds  of  silver  "  dollars."  In  these  cities 
Mexican  dollars,  old  and  new,  British  dollars,  old  Hong- 
kong dollars,  and  several  kinds  of  more  recent  Chinese 
dollars  passed  current,  usually  at  different  rates  when 
paid  in  substantial  quantities.  In  Hongkong,  for  ex- 
ample, the  unit  of  account  is  commonly  the  so-called 
"  Hongkong  currency,"  that  is,  the  bank  notes  of  two 
large  banking  institutions.  These  notes  are  redeemable 
in  "chopped" 2  dollars  which  when  paid  in  large  quantities 

1  Infra,  pp.  355  and  363. 

2  A  large  proportion  of  the  dollars  in  circulation  in  Hongkong  are  defaced 
by  "chopping"  with  a  metal  hammer,  the  object  of  the  chopping  being  to 
test  the  coins  as  to  their  genuineness. 


352  THE  PHILIPPINE  CURRENCY  REFORM 

usually  pass  by  weight.  In  Canton  and  other  places  near 
Hongkong,  the  chopped  dollar  usually  commands  a 
slight  premium  in  "Hong  Kong  currency" ;  the  new  Mexi- 
can dollars  nearly  always  command  a  premium ;  Mexican 
dollars  of  the  old  die  command  a  still  larger  premium, 
frequently  from  three  to  four  per  cent;  likewise  British 
dollars.  In  November  1905  a  premium  of  3^  per  cent  was 
quoted  in  Hongkong  for  the  British  dollar,  and  it  was 
said  that  the  million  or  more  new  Straits  Settlements 
dollars  that  were  exported  from  Singapore  before  exporta- 
tion was  prohibited  had  found  their  way  largely  to  Hong- 
kong 1  and  there  commanded  the  same  premium  as  the 
British  dollar  with  which  they  conformed  in  weight  and 
fineness. 

With  the  close  proximity  of  the  Philippine  Islands  to 
Hongkong,  and  the  large  Chinese  population  in  the  Is- 
lands, it  did  not  seem  improbable  that  Philippine  pesos 
might  be  shipped  as  money  to  Hongkong  and  there  pass 
current,  or  at  least  prove  acceptable  as  bank  reserves. 
Certainly,  if  they  would  not  be  received  at  a  premium  as 
" clean"  dollars,  they  would  readily  be  received  if  they 
should  lose  their  identity  by  being  " chopped."2 

The  total  expense  of  shipping  Philippine  silver  coins 
from  Manila  to  Hongkong,  it  was  estimated,  would  not 
exceed  J  of  one  per  cent.  Interest  charges  and  the  item  of 
exchange  were  almost  negligible.  There  would,  moreover, 
be  no  charges  for  melting,  refining,  etc.  The  situation 
may  be  illustrated  by  an  example.  Sterling  telegraphic 
transfers  in  Manila  on  November  9,  1905  were  quoted  at 
2Chf$d.  and  in  Hongkong  at  2o\d.  One  fourth  of  one  per 
cent  would  have  covered  all  charges  of  shipping  Philip- 
pine coins  to  Hongkong  on  that  date.  Therefore  if  Philip- 

1  Cf.  infra,  pp.  404-405. 

8  The  "chopped"  dollar  in  Hongkong,  as  measured  by  sterling  exchange, 
often  varied  several  per  cent  on  either  side  of  the  value  of  its  silver  content  in 
London.  Cf.  Sec.  Ann.  Rep.  Chief  Div.  Cur.  Phil.  Islands,  pp.  23-8. 


DANGER  TO  THE  NEW  CURRENCY 


353 


EXCHANGE  VALUE  AND  BULLION  VALUE  OF 
PHILIPPINE  PESO  UNDER  ACT  OF  1903 

CIS.  .  CIS. 


pine  pesos  had  commanded  the  same  premium  in  Hong- 
kong that  British  dollars  and  Straits  Settlements  dollars 
of  exactly  the  same  weight  and  fineness  are  said  to  have 
commanded,  i.e.,  3^  per  cent,  there  would  have  been  a  net 
profit  on  exportation  of  about  3  per  cent,  although  the  ex- 
portation of  Philippine  coins  to  London  as  bullion  on  that 
day  (the  prompt  price  of  silver  having  been  2g-^d.)  would 
have  involved  the  exporter  in  a  loss. 

The  situation  in  the  Philippines  was  further  compli- 
cated by  the  fact  that  the  supply  of  pesos  in  the  treasury 
vaults  available  for 
increasing  the  cir- 
culation was  low, 
and  there  werepros- 
pects  that  the 
Government  would 
soon  be  called  upon, 
under  the  princi- 
ples of  the  gold-ex- 
change standard,  to 
purchase  silver  bul- 
lion  for  further 
coinage. 

The  accompany- 
ing chart  shows  the 
fluctuations  in  the       |    |  £  a  u? j  £  D  u  |  £ 1 1  S  |  § 
exchange   value    of 

the  peso,  as  measured  in  monthly  cable-exchange  rates 
in  Manila  on  London  (reduced  at  par  exchange  between 
New  York  and  London  to  United  States  currency  equiva- 
lents), and  in  its  bullion  value  at  the  current  price  of 
British  standard  silver  in  London.  The  figures  are  monthly 
averages.1 

1The  figures  for  this  chart  were  computed  from  the  records  of  the 
Manila  branch  of  the  Hongkong  and  Shanghai  Banking  Corporation,  and 
from  the  annual  compilations  of  the  Director  of  the  Mint. 
2  A 


42 


40 


354  THE  PHILIPPINE   CURRENCY  REFORM 

Measures  taken  to  Prevent  New  Silver  Coins  from  being 
Melted  or  Exported 

On  November  6,  1905  the  price  of  silver  in  London 
passed  the  28 d.  mark  (reaching  28fd.),  and  the  Philippine 
Government  began  to  consider  measures  to  protect  its  cur- 
rency. An  Act  was  passed  November  17,  to  take  effect 
immediately,  prohibiting  the  exportation  of  Philippine 
silver  coins  or  of  bullion  made  by  melting  or  otherwise 
mutilating  such  coins.1  The  Act  provided  that  any  such 
silver  coin  "which  is  exported,  or  of  which  the  exportation 
is  attempted  .  .  .  shall  be  liable  to  forfeiture  under  due 
process  of  law,  and  one  third  of  the  sum  or  value  of  the 
bullion  so  forfeited  shall  be  payable  to  the  person  upon 
whose  information,  given  to  the  proper  authorities,  the 
seizure  of  the  money  or  bullion  so  forfeited  is  made.  .  .  ." 
It  was  further  enacted  that  to  export  or  attempt  to 
export  such  coin  or  bullion  shall  be  "a  criminal  offence, 
punishable,  in  addition  to  the  forfeiture  of  said  coins  or 
bullion  ...  by  a  fine  not  to  exceed  ten  thousand  pesos, 
or  by  imprisonment  for  a  period  not  to  exceed  one  year,  or 
both,  in  the  discretion  of  the  court."  This  law  suggests 
some  of  the  currency  laws  of  the  seventeenth  and  eighteenth 
centuries  in  Europe  which  were  inspired  by  the  economic 
philosophy  of  the  Mercantilists.  Its  raison  d'etre,  however, 
was  far  different.  It  was  looked  upon  merely  as  a  tem- 
porary and  emergency  measure,  and  the  authorities  fully 
appreciated  that  if  the  profits  realizable  on  illicit  expor- 
tation should  become  very  large,  no  penalty  however 
severe  could  prevent  smuggling.  Many  thought  that  the 
price  of  silver  had  already  reached  its  maximum.  At  any 
rate  the  Philippine  Government  would  have  to  await  the 
action  of  Congress  for  authority  to  recoin. 

The  Act  prohibiting  the  exportation  of  silver  coin  and 
bullion  proved  effective  for  some  time,  and  not  until  the 

1  Act  No.  1411.    Official  Gazette,  Nov.  29, 1905,  p.  659. 


DANGER  TO  THE  NEW  CURRENCY        355 

summer  of  1906  was  there  any  evidence  that  it  was  being 
evaded  to  any  extent.  On  May  23,  1906  silver  in  London 
was  quoted  at  3ifd.  or  7.3  per  cent  above  the  bullion  par 
of  the  Philippine  peso ;  there  was  then  a  slight  reaction 
through  August,  but  on  September  24  the  price  reached 
3if d.  or  8.5  per  cent  above  bullion  par,  on  October  27 
32^.  or  11.3  per  cent  above  bullion  par,  and  on  Novem- 
ber 17  33|d.  or  13.2  per  cent  above  bullion  par.  This 
last  price  represents  the  maximum  price  of  silver  from 
October  1893  to  the  recent  rise  in  the  spring  of  1916,  dur- 
ing which  it  reached  37^.  on  May  3.  Reference  to  the 
chart  on  page  353  will  show  that  the  average  bullion  value 
of  the  peso  rose  from  44.1  cents  in  April  1905  to  50.3 
cents  in  November,  51.2  cents  in  December,  and  52.1  cents 
in  February  1906;  it  then  fluctuated  irregularly,  react- 
ing to  50.1  cents  in  July,  and  then  rose  rapidly,  reaching 
a  maximum  of  55.9  cents  for  November.  It  then  declined 
to  51.7  cents  in  March,  reacted  to  54.2  cents  in  August, 
and  after  that  declined  rapidly.  The  gold  value  of  the 
peso  as  money,  expressed  in  sterling  cable  rate  equivalents, 
was  nearly  constant  during  the  entire  period,  the  range 
being  from  49.18  cents  to  49.56  cents,  or  0.8  per  cent. 
At  such  silver  prices  the  profits  realizable  upon  exportation 
were  so  large  that  it  is  not  surprising  that  there  was  some 
smuggling  when  one  bears  in  mind  the  peculiar  character 
of  the  Philippine  coast  line.  Notwithstanding  the  rigor 
of  the  law  prohibiting  the  exportation  of  silver  coins 
or  bullion  obtained  by  melting  them,  and  the  extreme 
vigilance  exercised  by  the  Government,  it  is  estimated  that 
between  P 500,000  and  Pi, 000,000  were  exported,  all  of  it 
probably  going  to  China.  In  fact  the  head  office  of  the 
Hongkong  and  Shanghai  Banking  Corporation  at  Hong- 
kong was  reported  to  have  held  in  its  vaults  at  one  time  as 
much  as  P  400,000.* 

1  Cf.  Ann.  Reps.  Treas.  Phil.  Islands,  1907,  p.  20;  1912,  p.  34,  and  1913, 
p.  35 ;   for  varying  estimates. 


356  THE  PHILIPPINE   CURRENCY  REFORM 

In  addition  to  the  law  prohibiting  the  exportation  of 
silver,  other  temporary  measures  were  soon  taken  to  enable 
the  Government  to  meet  the  increasing  demand  for  cur- 
rency without  the  necessity  of  suffering  the  losses  which 
would  result  from  the  buying  of  silver  for  further  coinage 
at  prices  above  bullion  par.  Had  exchange  in  New  York 
on  Manila  at  this  time  gone  to  the  currency-export  point 
under  the  gold-exchange  standard,  and  had  peso  drafts 
on  the  Gold  Standard  Fund  in  Manila  been  purchased  in 
considerable  quantities  from  the  Government's  Gold  Stand- 
ard Fund  agent  in  New  York,  the  Philippine  Government 
would  have  found  itself  in  the  awkward  position  of  trying 
to  maintain  single  handed  a  system  of  currency  that,  in 
effect,  would  have  been  national  bimetallism  at  a  ratio  of 
32.25  to  i — a  ratio  greatly  undervaluing  silver.1  The 
Government's  telegraphic  transfer  rate  for  the  sale  of  Gold 
Standard  Fund  drafts  in  Manila  on  New  York  was  tem- 
porarily reduced  by  an  order  of  March  15,  1906 2  from 
ii  per  cent  to  f  of  one  per  cent,  a  procedure  of  very  dubious 
advisability  under  the  principle  of  the  gold-exchange  stand- 
ard, and  one  which  gave  little  if  any  actual  relief.3  United 
States  paper  money  still  circulated  in  the  Philippines  and 
the  Government  resorted  to  its  more  extensive  use.  With 
this  object  the  sum  of  $1,850,000  of  United  States  cur- 
rency belonging  to  the  Philippine  Government  and  on 
deposit  in  New  York  was  ordered  shipped  to  Manila  in 
the  spring  of  igo6.4 

Substitution  of  Gold  for  Silver  as  Part  of  Certificate  Reserve 

A  measure  of  more  permanent  importance,  calculated 
not  only  to  meet  the  demands  of  the  time  for  more  pesos, 

1  Supra,  pp.  318-22. 

2  Administrative  order,  No.  3.     Official  Gazette,  Mar.  28,  1906,  p.  185. 

3  Cf.  Ann.  Rep.  Treas.  Phil.  Islands,  1906,  p.  14. 

4  Ibid. 


DANGER  TO  THE  NEW  CURRENCY        357 

without  the  necessity  of  further  purchases  of  silver  bullion, 
but  also  to  render  the  Philippine  Government  more  inde- 
pendent of  the  silver  market  in  the  future,  was  the  one 
recommended  by  the  Philippine  authorities  to  the  United 
States  Congress  with  reference  to  the  silver  certificate  re- 
serve. Philippine  silver  certificates  were  issued  on  the 
same  plan  as  are  silver  certificates  in  the  United  States, 
being  backed  peso  for  peso  by  silver  coin  in  the  silver  cer- 
tificate reserve.  The  plan  had  been  adopted  for  the  Phil- 
ippines by  Congress  in  the  Philippine  Coinage  Act  of 
March  2,  1903,  and  was  subject  to  amendment  only  by 
Congress.  In  June  1906  there  was  in  circulation  ap- 
proximately P  10,500,000  of  silver  certificates,  representing 
an  equal  amount  of  silver  pesos  in  reserve.  At  the  same 
time  there  was  in  the  Philippine  treasury,  as  there  had 
been  for  a  number  of  years,  several  million  dollars  of  United 
States  gold  coin,  which  had  been  shipped  to  the  Philippines 
for  purposes  of  United  States  army  and  navy  disburse- 
ments, and  which  were  not  acceptable  as  a  circulating 
medium  in  the  Islands,  since  gold  coins  when  paid  out 
promptly  disappeared  into  hoards  or  were  exported.  The 
plan  recommended  by  the  Philippine  Government  and 
adopted  by  Congress  in  the  Act  of  June  23,  1906  was  this : 
the  Treasurer  of  the  Philippine  Islands,  with  the  approval 
of  the  Governor-General,  was  granted  authority  to  sub- 
stitute, for  any  part  of  the  silver  pesos  thereafter  deposited 
in  the  silver  certificate  reserve,  gold  coin  of  the  United 
States  (which  was  unlimited  legal  tender  in  the  Philippines 
at  the  rate  of  a  dollar  for  two  pesos)  and  to  redeem  the 
certificates  thereafter  issued  in  either  silver  pesos  or  gold 
coin  of  the  United  States  at  his  option ;  provided  that  the 
amount  of  gold  coin  held  in  the  reserve  should  not  at  any 
time  exceed  sixty  per  cent  of  the  certificates  outstanding. 
The  authority  thus  given  was  immediately  utilized  by  the 
Philippine  Government,  and  the  contract  upon  the  certif- 
icates was  so  altered  as  to  make  them  payable  in  silver 


358  THE  PHILIPPINE  CURRENCY  REFORM 

pesos  or  gold  coin  of  the  United  States  at  the  option  of  the 
Philippine  Government. 

This  action  was  difficult  for  many  people  in  the  United 
States  to  understand,  since  it  represented  such  a  reversal 
of  our  own  currency  experiences.  Silver  coin  in  the  Phil- 
ippines had  proven  too  valuable  because  of  the  appreciation 
of  silver  and,  in  order  to  avoid  the  necessity  of  pur- 
chasing more  silver  bullion  at  the  time  and  to  prevent  the 
silver  certificates  from  appreciating  above  the  standard 
unit  of  value  (i.e.,  12.9  grains  of  gold  .900  fine  or  the 
equivalent  of  $0.50  in  gold),  the  certificates  were  made 
payable  in  the  future,  at  the  option  of  the  Government, 
in  the  cheaper  money,  i.e.,  gold  coin. 


CHAPTER  VIII 
THE  RECOINAGE 

THE  measures  thus  far  taken  offered  only  a  partial  solu- 
tion of  the  problem.  Most  of  the  outstanding  silver  cer- 
tificates still  bore  on  their  face  a  promise  to  pay  in  silver, 
and  nearly  two  thirds  of  the  money  in  circulation  in  the 
Islands  was  silver  coin  worth  much  more  as  bullion  than 
as  money,  if  it  could  only  be  gotten  out  of  the  Philippines. 
Obviously  a  recoinage  of  this  money  into  coins  of  a  smaller 
fine  silver  content  was  imperative.  Authority  to  recoin 
was  sought  of  the  United  States  Congress,  and  Congress 
responded  promptly  in  the  Act  of  June  23,  1906,  which  left 
the  matter  of  recoinage  very  largely  to  the  discretion  of 
the  Philippine  Government. 

Section  i  of  this  Act  provided 

"  That,  with  the  approval  of  the  President  of  the  United 
States,  the  Government  of  the  Philippine  Islands  is  ... 
authorized  ...  to  change  the  weight  and  fineness  of  the 
[Philippine]  silver  coins,  .  .  .  and  may  in  its  discretion 
provide  a  weight  and  fineness  proportionally  less  for  sub- 
sidiary coins  than  for  the  standard  Philippine  pesos,  and 
may  also  .  .  .  recoin  any  of  the  existing  coins  of  the  Philip- 
pine Islands  at  the  new  weight  and  fineness  when  such  coins 
are  received  into  the  treasury  or  into  the  Gold-Standard 
Fund  of  the  Philippine  Islands :  Provided,  that  the  weight 
and  fineness  of  the  silver  peso  to  be  coined  .  .  .  shall  not  be 
reduced  below  seven  hundred  parts  of  pure  silver  to  three 
hundred  parts  of  alloy." 

Congress,  accordingly,  placed  no  restriction  upon  the  weight 
of  the  new  coins  and  practically  none  upon  the  fineness, 

359 


360  THE  PHILIPPINE   CURRENCY  REFORM 

since  no  one  thought  of  adopting  a  fineness  lower  than  .700 
for  any  of  the  silver  coins. 

The  problem  of  deciding  to  what  extent  and  in  what 
manner  the  fine  silver  content  of  the  coins  should  be  re- 
duced was  not  an  easy  one.  Certain  technical  require- 
ments of  coinage  obviously  must  be  met,  so  that  the  coins 
would  be  satisfactory  in  wearing  qualities  and  in  appear- 
ance. In  addition  the  new  coins  must  meet  three  impor- 
tant conditions,  (i)  They  must  be  reduced  in  fine  silver 
content  sufficiently  to  remove  the  danger  of  their  being 
driven  to  the  melting  pot.  But  how  could  this  be  done 
unless  one  could  foresee  the  future  price  of  silver?  When 
Congress  passed  the  Philippine  Coinage  Act,  March  2, 
1903,  we  have  seen,  it  allowed  a  margin  of  32.4  per  cent,1 
which  was  believed  by  nearly  every  one  to  be  ample.  That 
margin  had  now  been  used  up  and  13  per  cent  more,2  by 
the  advance  in  silver.  Some  persons  well  informed  with 
regard  to  the  silver  market  were  predicting  a  continued  rise 
in  silver  until  the  time-honored  ratio  of  15!  to  one  should 
again  be  realized.  Clearly  the  history  of  the  price  of  silver 
during  the  immediately  preceding  years  did  not  justify  much 
confidence  in  prophesies  concerning  its  future.  (2)  The 
second  condition  was  that  the  coins  should  not  be  so  re- 
duced in  weight  as  unduly  to  encourage  counterfeiting.3 
(3)  The  other  condition  was  that  the  coins  should  not  be 
reduced  so  much  in  weight  as  to  endanger  their  acceptability 
by  the  people  as  equivalent  to  the  existing  larger  weight 
coins.  The  natives  would  naturally  be  suspicious  of  any 
reduction  in  the  size  of  the  coins  so  soon  after  the  existing 
Philippine  coins  had  been  put  into  circulation  at  a  premium 
over  the  old  silver  standard  coins  for  which  they  were 
forcibly  exchanged  and  with  which  they  had  been  long 

1  This  figure  is  derived  by  comparing  the  bullion  par  of  the  peso,  2gd.  per 
ounce,  with  the  average  price  of  silver  for  February  1903,  i.e.,  22-s^d. 

2  Cf.  supra,  pp.  353  and  355.    This  percentage  is  computed  from  the 
maximum  price  of  silver  in  1906,  i.e.,  33|d.  on  November  17. 

3  Cf.  supra,  p.  305. 


THE  RECOINAGE  361 

familiar.  It  is  true  they  were  accustomed  to  monetary 
changes  and  to  light  weight  silver  coins  circulating  at  a  par 
with  heavier  coins.1  Unfortunately,  however,  many  of 
them  were  suspicious  of  the  American  Government,  and 
there  were  not  wanting  those,  especially  Chinese  money 
changers,  who  would  gladly  exploit  their  ignorance  and 
distrust. 

After  these  various  factors  were  weighed,  it  was  decided 
that  the  wisest  plan,  in  spite  of  the  risks  of  experiencing 
some  temporary  difficulties  in  putting  the  new  coins  into 
circulation,  was  to  make  a  very  substantial  reduction  in 
both  the  weight  and  fineness  of  all  the  silver  coins.  The 
gross  weight  of  the  peso  was  accordingly  reduced  from  416 
grains  to  twenty  grams  (i.e.,  308.66  grains),  and  the  fine- 
ness from  .900  to  .800,  thus  reducing  the  fine  silver  content 
of  the  peso  by  34  per  cent,  and  changing  the  ratio  with  gold 
from  32.25  to  i  to  21.3  to  i.  With  this  ratio  the  new 
peso  cannot  be  in  danger  of  the  melting  pot  until  silver 
reaches  approximately  44!^.,  and  before  that  time  both  the 
Indian  rupee  (with  its  ratio  to  gold  of  21.9  to  i)  and  the 
Japanese  silver  coins  (with  their  ratio  of  21.6  to  i)  will 
have  passed  the  bullion  par.  The  Philippine  peso,  there- 
fore, is  well  protected  by  the  large  silver  circulation  of 
these  two  countries. 

The  recoinage  law  made  the  silver  subsidiary  coins 
exactly  proportionate  in  weight  to  the  peso,  but  reduced 
their  fineness  from  .900  to  .750.  Having  a  larger  per- 
centage of  alloy  than  the  peso,  these  subsidiary  coins  can- 
not reach  their  bullion  par  unless  the  price  of  silver  rises 
to  472^.  (giving  a  ratio  with  gold  of  19.9  to  i).  Long 
after  the  peso  would  go  to  the  melting  pot,  the  subsidiary 
coins  would  remain  in  circulation;  and  to  orientals  the 
half-peso  is  usually  as  popular  a  coin  as  the  peso.  In 
Spanish  times  the  half -peso  was  unlimited  legal  tender. 

Shipments  of  the  old  coins  to  the  United  States  mints 
1  Supra,  pp.  246-53. 


362  THE  PHILIPPINE  CURRENCY  REFORM 

for  recoinage  began  December  15,  IQ06.1  By  the  end  of  the 
fiscal  year  1911,  P  29,498,569  out  of  a  total  of  P  32,779,282 
had  been  returned  to  the  mint  for  recoinage.2  Since  that 
time  they  have  been  coming  to  the  government  treasuries 
in  small  quantities  every  year  and  been  shipped  to  the 
United  States  for  recoinage.3 


Putting  the  New  Coins  into  Circulation 

The  first  consignment  of  the  new  coins  arrived  in  Manila 
on  May  4,  1907,  and  the  operation  of  placing  the  new 
money  in  circulation  was  commenced  immediately.  A 
provision  in  the  Philippine  Recoinage  Act  of  December  6, 
1906  required,  for  the  purpose  of  expediting  the  ready 
circulation  of  the  new  coins,  that  the  Treasurer  should 
prepare  an  explanatory  circular  which  should  be  translated 
into  the  various  languages  and  dialects  of  the  Philippines 
and  be  distributed  throughout  the  Islands.  This  circu- 
lar should  " explain  the  reason  for  the  recoinage"  and 
should  "  inform  the  public  that  the  new  coins  will  be  re- 
ceived in  payment  of  all  taxes  and  government  dues,  and 
will  be  legal  tender  for  private  debts  as  the  equivalent  of 
the  old  coins;  that  they  will  be  receivable  in  Manila  for 
the  purchase  of  gold  drafts  on  the  same  terms  as  the  old 
coins,  and  that  they  may  be  exchanged  on  demand  at  the 
insular  treasury  in  Manila  and  at  various  provincial  treas- 
uries throughout  the  Islands  for  silver  certificates,  and  if 
desired  for  nickel  and  copper  coins."  Such  a  circular  was 
prepared  and  translated  into  Spanish,  Chinese,  and  eleven 

1  Report  of  the  Treasurer  of  the  Philippine  Islands,  1907,  in  Report  of 
Philippine  Commission,  1907,  Part  III,  o,  68. 

2  Ann.  Rep.  Treas.  Phil.  Islands,  1911,  p.  24. 

3  Just  as  this  is  going  to  press  it  is  announced  that  as  a  result  of  the  great 
rise  in  the  price  of  silver  in  the  spring  of  1916  and  of  India's  heavy  demand 
for  the  white  metal,  many  Philippine  pesos  of  the  first  American  coinage  have 
found  their  way  into  India  and  been  melted  down  for  the  coinage  of  rupees. 
National  City  Bank  of  New  York,  Circular  Letter  of  June  1916,  p.  5. 


THE  RECOINAGE  363 

native  dialects  and  distributed  throughout  the  country. 
"In  addition,  all  provincial  treasuries  were  directed  to 
carry  on  a  general  campaign  of  education  in  order  that .  .  . 
[the  people]  might  become  thoroughly  acquainted  with 
the  new  currency  and  the  reasons  for  the  change  in  its  weight 
and  fineness."  1 

At  first,  as  was  anticipated,  there  was  some  discrimi- 
nation against  the  new  coins,  particularly  in  the  interior 
of  the  country.  From  some  sections  reports  were  received 
that  Chinese  traders  would  not  receive  the  new  coins  in 
business  transactions  except  at  a  discount  varying  from  20 
to  40  per  cent,  and  that  they  were  offering  as  high  as  5  per 
cent  premium  in  the  new  coin  for  the  old.  The  educational 
campaign,  carried  on  by  the  Government  and  by  the  banks, 
however,  coupled  with  the  fact  that  the  new  silver  coins 
were  readily  interchangeable  at  government  treasuries 
throughout  the  Islands  for  silver  certificates  and  nickel 
and  copper  coins  with  which  the  people  were  familiar, 
soon  broke  down  all  discrimination,  and  by  October  15, 
1907  the  new  coin  was  "  accepted  without  question  in 
every  part  of  the  Islands,  and  no  reports  or  complaints 
have  been  received  for  the  past  two  months  as  to  discount- 
ing, and  so  far  as  can  be  ascertained  no  premium  is  now 
paid  for  the  old  coin."  2 

Domestic  Drafts  Sold  by  Government 

Shortly  after  the  recoined  money  began  to  be  put  in  cir- 
culation, the  Philippine  Government  passed  an  Act  intended 
to  expedite  the  introduction  of  the  new  coins  and  to  facili- 
tate the  ready  adjustment  of  the  currency  supply  to  local 
needs.3  This  Act  authorized  the  Insular  Treasurer  to  sell 
demand  drafts  and  telegraphic  transfers  in  sums  of  not 
less  than  P  500  upon  funds  in  the  hands  of  provincial  treas- 

1  Ann.  Rep.  Phil.  Com.,  1907,  Part  HI,  p.  68.         2  Ibid.,  pp.  68-69. 
3  Act  No.  1636  of  April  30, 1907.     Official  Gazette,  1907,  p.  305. 


364  THE  PHILIPPINE  CURRENCY  REFORM 

urers,  whenever  such  sales  could  be  made  without  embar- 
rassment to  the  insular  treasury.  The  purchase  money  was 
to  be  credited  on  the  books  of  the  insular  treasury  to  the 
provincial  treasurers.  Under  similar  conditions  the  vari- 
ous provincial  treasurers  were  authorized  to  sell  demand 
drafts  and  telegraphic  transfers  upon  funds  to  the  credit 
of  their  respective  provinces  in  the  insular  treasury,  and 
upon  other  provincial  treasuries.  The  premiums  for  these 
exchanges  were  to  be  fixed  from  time  to  time  by  the  Secre- 
tary of  Finance  and  Justice. 

There  were  some  delays  1  in  putting  the  system  into 
effect,  and  the  exchanges  were  not  in  full  operation  until 
March  1908.  The  rates  fixed  by  the  Secretary  of  Finance 
and  Justice,  which  were  made  uniform  throughout  the 
Archipelago,  were  one  fourth  of  one  per  cent  for  demand 
drafts,  and  one  fourth  of  one  per  cent  plus  all  telegraphic 
charges  for  telegraphic  transfers  —  rates  which  obviously 
favored  telegraphic  transfers  by  an  amount  nearly  equal 
to  the  interest  during  the  period  required  for  the  trans- 
mission of  demand  drafts.2  These  rates  were  materially 
cheaper  than  the  expense  of  shipping  currency  by  express, 
and  the  Government's  transfer  system  was  promptly  taken 
advantage  of  by  merchants  and  individuals,  substantial 
amounts  being  transferred  both  to  and  from  Manila,  and 
some  between  the  provinces.3 

1  Ann.  Rep.  Treas.  Phil.  Islands,  1908,  p.  20. 

2  This  advantage  was  often  trivial  because  for  small  transfers  the  cost  of 
the  telegram  was  not  negligible,   although  a  code  was  regularly  used. 
Furthermore,  there  were  frequent  interruptions  in  the  telegraph  service  to 
certain  provinces  and  often  long  delays  in  the  transmission  of  telegrams. 

3  The  total  transfers  so  far  reported  by  fiscal  years  are  given  below,  by 
far  the  larger  part  being  by  telegraph : 

1908  .  .  .  P     449,502  (3  months  only) 

1909  .  .  .  1,480,971 

1910  .  .  .  2,556,599 
iQ"  •  •  •  2,573,193 

1912  .     .     .        3,086,129 

1913  .     .     .        2,673,787 

The  decrease  in  1913  is  said  to  be  due  to  the  increasing  use  of  checks 
on  the  recently  established  agencies  of  the  Philippine  Agricultural  Bank. 


CHAPTER  IX 

THE  GOLD  STANDARD  FUND  SINCE  THE  RECOINAGE  OF 
1906-1909 

INCIDENTAL  to  the  work  of  protecting  and  improving 
the  Philippine  coinage  system  by  the  recoinage  the  Gov- 
ernment realized  a  very  substantial  profit.  The  new  pesos 
contain  only  about  66  per  cent  as  much  pure  silver  to  the 
peso  as  the  old,  and  the  new  subsidiary  coins  only  about 
62  per  cent.  If  all  the  old  coins  were  recoined  into  coins  of 
the  same  denominations,  which  was  approximately  what 
was  done,  there  would  have  resulted  a  gross  profit  of  about 
Pi 7,450,000,  provided  of  course  there  were  need  of  the 
additional  coins  for  monetary  purposes,  as  was  the  case.1 
At  the  end  of  the  fiscal  year  1913  there  remained  unac- 
counted for  of  the  first  Philippine  coinage  (in  round 
numbers)  P  2, 676,000,  of  which  P  1,856,000  or  69  per  cent 
consisted  of  pesos  and  P  8  20,000  or  31  per  cent  of  subsidiary 
silver  coins.2  These  coins  for  some  years  to  come  will  un- 
doubtedly continue  to  flow  slowly  into  the  treasury  and  to 
be  recoined.  Some  of  them  —  no  one  knows  how  many 3  — 
were  smuggled  out  of  the  Islands  in  1906  and  1907  when 
on  account  of  the  rise  in  silver 4  they  were  worth  more  for 

1  The  amount  of  Philippine  currency,  exclusive  of  bank  notes,  in  circula- 
tion in  the  Islands  increased  from  P  30,030,00x3  June  30, 1906  to  P  46,601,000 
June  30,  1913.     Ann.  Rep.  Treas.  Phil.  Islands,  1913,  p.  38. 

2  Ibid.,  p.  35. 

3  The  Philippine  Treasurer  in  his  1907   Report    (p.  20)  estimated  the 
amount  at  between  P  750,000  and  P  1,000,000;   in  his  1912  Report  (p.  34) 
he  estimated  the  amount  outside  of  the  Islands  at  at  least  P  503,000 ;  and  in 
his  1913  Report  (p.  35)  at  at  least  P  676,000. 

4  Supra,  pp.  355  and  363. 

365 


366  THE  PHILIPPINE   CURRENCY  REFORM 

export  than  for  home  circulation.  If  we  assume  the  amount 
outside  of  the  Islands  in  1913  to  have  been  P  600,000,  all 
in  the  form  of  peso  pieces  —  probably  the  only  form  in 
which  the  money  was  exported  —  and  if  we  assume  that 
none  of  it  will  be  smuggled  back,1  the  gross  profit  on 
the  recoinage  would  be  reduced  to  P  17,141,000.  From 
this  sum  must  be  deducted  an  amount  sufficient  to 
cover  the  expenses  chargeable  to  the  recoinage  —  ex- 
penses of  withdrawing  approximately  P  30,000,000  of  old 
coins  from  circulation,  of  shipping  them  to  the  San  Fran- 
cisco mint,  melting,  refining,  recoining,  and  shipping  back 
to  the  Philippines.  For  most  of  these  items  figures  are  not 
available;  but  basing  conclusions  upon  such  data  as  are 
available  for  this  recoinage  and  for  the  coinage  of  1903,  we 
are  probably  on  the  safe  side  in  allowing  five  per  cent  upon 
the  recoinage  to  cover  all  expenses.  Five  per  cent  upon 
the  recoinage  of  P  46,000,000  is  P  2,300,000,  which  deducted 
from  the  P  17,141,000  gross  profits  on  recoinage  leaves 
P  14,841,000  as  the  net  profit  on  recoinage  —  a  sum  equal 
to  approximately  32  per  cent  of  the  entire  Philippine  cir- 
culation (P  46,600,000  exclusive  of  bank  notes)  at  the  end 
of  the  fiscal  year  1913.  Under  the  provisions  of  section  i 
of  the  Philippine  Gold  Standard  Act,2  this  entire  profit 
inured  to  the  Philippine  Gold  Standard  Fund,  "a  separate 
and  trust  fund  in  the  insular  treasury,  ...  to  be  used  for 
the  purpose  of  maintaining  the  parity.  .  ."of  the  Philip- 
pine currency  with  the  gold  unit  of  value.  But,  with  this 
large  addition,  the  Gold  Standard  Fund,  which  at  the  end 
of  the  fiscal  year  1906  amounted  to  P  5,669,000 3  or  19  per 
cent  of  the  entire  circulation,  became  unreasonably  large. 

1  The  smuggled  pesos  apparently  went  mostly  to  Hongkong  and  there 
were  used  in  bank  reserves  as  money.     The  great  rise  in  the  price  of  silver 
in  1916  drove  many  of  them  to  the  melting  pot.     It  has  already  been 
noted  that  considerable  quantities  were  melted  down  for  rupee  coinage  in 
India  in  the  spring  of  1916.     See  supra,  p.  363. 

2  Supra,  p.  318. 

*  Ann.  Rep.  Treas.  Phil.  Islands,  1906,  p.  12. 


THE  GOLD  STANDARD  FUND          367 

At  the  end  of  the  fiscal  year  1911  it  amounted  to  P  20,620,000,* 
or  43  per  cent  of  the  entire  circulation.2 


Size  of  Gold  Standard  Fund 

A  43  per  cent  reserve,  increasing  each  year  through  the 
premiums  on  Gold  Standard  Fund  exchange,3  is  obviously 
more  than  was  needed  for  the  maintenance  of  the  parity. 
This  is  true  despite  the  fact  that  the  extreme  variations  that 
sometimes  take  place  in  the  currency  needs  of  the  Islands 
make  necessary  a  large  Gold  Standard  Fund.  There  have 
been  two  examples  of  these  extreme  variations  since  the 
American  occupation.  The  first  was  in  1903  when,  largely 
as  a  result  of  the  failure  of  the  Philippine  rice  crop,  there 
was  a  net  commercial  exportation  from  the  Islands  of  about 
15,000,000  local  pesos,  out  of  a  total  circulation  certainly  not 
exceeding  50,000,000  pesos.4  A  recurrence  of  such  a  slump 
in  the  currency  needs  would  obviously  make  a  tremendous 
demand  upon  the  Gold  Standard  Fund  in  New  York  —  a 
demand  analogous  to  that  which  caused  so  much  anxiety 
in  India  in  1907  and  I9o8.5  A  second  example  is  the  in- 
creased demand  for  currency  in  1910,  which  resulted  largely 
from  tariff  changes  favorable  to  the  Philippines  in  the 
Payne- Aldrich  tariff  of  1909,  and  led  to  an  increase  in  the 
Philippine  circulation  from  P  41, 500,000  June  30,  1909  to 

1  Ibid.,  1912,  p.  29. 

2  The  Fund  had  assumed  these  proportions  despite  the  fact  that  the  last 
million  dollars  of  the  certificates  of  indebtedness  issued  to  provide  funds  for 
the  initial  establishment  of  the  gold  standard  in  the  Philippines  (supra, 
p.  315)  had  been  retired  September  i,  1907  out  of  the  profits  inuring  to  the 
Fund.     Sec.  Ann.   Rep.  Chief   Div.  Cur.,  p.  3 ;   and  Ann.  Rep.   Treas. 
Phil.  Islands,  1908,  p.  27. 

8  The  premiums  realized  by  the  Government  on  drafts  sold  against  the 
Gold  Standard  Fund  for  the  ten  years  1904  to  1913  inclusive  amounted  to 
P  1,940,068.  Ann.  Rep.  Treas.  Phil.  Islands,  1913,  p.  25. 

4  Supra,  p.  327. 

6  Supra,  pp.  113-15- 


368  THE  PHILIPPINE   CURRENCY  REFORM 

P  48,700,000  June  30, 1910,  an  increase  of  over  17  per  cent.1 
On  the  other  hand,  the  heavy  demands  for  transfers  from 
the  United  States  to  the  Philippines  for  the  purpose  of 
army  and  navy  disbursements  in  the  Islands,  and  the  ease 
with  which  United  States  funds  can  be  placed  to  the  credit 
of  the  Gold  Standard  Fund  in  New  York  in  exchange  for 
Philippine  currency  credits  to  the  army  and  navy  in  Manila, 
render  improbable  for  the  time  being  any  embarrassing  de- 
pletion of  the  Gold  Standard  Fund  in  New  York.  As  time 
goes  on,  however,  and  these  army  and  navy  transfers  rep- 
resent a  smaller  and  smaller  proportion  of  the  normal  ex- 
change demands  of  the  Philippines  on  New  York,  this  safety 
valve  will  be  less  and  less  effective.  For  the  present,  none 
the  less,  a  43  per  cent  reserve  would  probably  be  excessive. 
The  demands  for  drafts  on  the  Gold  Standard  Fund  in 
New  York  have  been  large,  normally  running  (since  1907) 
from  ten  to  fourteen  million  dollars  a  year;  yet  it  has 
been  the  very  army  and  navy  transfers,  which  provided 
the  United  States  currency  credits  in  New  York  for 
meeting  the  Philippine  drafts,  that  created  in  Manila  the 
need  for  the  drafts  themselves.  They  did  this  through 
continually  releasing  from  the  Gold  Standard  Fund  and 
pumping  into  a  circulation  already  redundant  large  quan- 
tities of  Philippine  currency  for  army  and  navy  disburse- 
ments.2 

1  Another  example  is  the  increase  in  the  circulation  from  June  30, 1906  to 
June  30,  1907,  which  was  from  30,000,000  to  42,800,000.     It  is  a  question, 
however,  whether  all  this  represented  a  real  increase  in  response  to  trade  de- 
mands. 

2  For  example,  in  191 2  exchange  sold  in  Manila  on  the  Gold  Standard  Fund 
in  New  York  amounted  to  P  24,400,000,  but  this  did  not  permanently  de- 
plete the  Fund  in  New  York  by  an  equivalent  amount  of  United  States 
currency  and  result  in  retiring  for  a  period  the  above  amount  of  Philippine 
currency  from  circulation  in  the  Philippines,  as  would  have  been  expected 
under  the  principle  of  the  gold-exchange  standard  (supra,  pp.  319-22),  be- 
cause, although  there  was  no  commercial  exchange  sold  in  New  York  on  the 
Philippine  currency  part  of  the  Fund  in  Manila,  "the  Insular  Treasurer 
furnished  the  Treasurer  of  the  United  States  credits  [out  of  the  Gold 
Standard  Fund]  in  Manila  amounting  to  P  22,000,000,  in  exchange  for  an 


THE  GOLD  STANDARD  FUND          369 

The  Investment  of  Part  of  the  Gold  Standard  Fund 

Under  the  circumstances  the  proper  course  for  the 
Philippine  Government  was  to  determine,  after  careful 
study,  how  large  a  gold  standard  reserve  would  be  needed 
to  meet  all  probable  demands,  allowing  a  fair  margin  of 
safety,  and  then  to  transfer  to  the  general  fund  of  the  treas- 
ury the  excess  in  the  Gold  Standard  Fund  over  that 
amount.  This  the  Philippine  Government  did  in  Act  No. 
2083,  passed  December  8,  191 1,1  entitled  "an  act  to  fix  the 
amount  of  the  Gold  Standard  Fund  and  .  .  .  authorizing 
the  deposit  of  the  excess  of  the  amount  so  fixed  to  the 
credit  of  the  general  fund  of  the  treasury,  and  authorizing 
the  investment  of  a  portion  of  the  said  Gold  Standard 
Fund."  The  Act  fixed  the  Fund  at  35  per  cent  of  the 
money  in  circulation  and  available  for  circulation.2 

equivalent  amount  credited  by  the  Treasurer  of  the  United  States  to  the 
Gold  Standard  Fund  in  New  York."  Cf.  Ann.  Rep.  Treas.  Phil.  Islands, 
1912,  p.  29;  and  infra,  pp.  381-82. 

1  Official  Gazette,  1912,  pp.  2177-78. 

2  Although  the  certificates  of  indebtedness  issued  to  assist  in  inaugurating 
the  gold  standard  in  the  Philippines  had  long  since  been  paid  off  (supra, 
p.  367),  and  the  likelihood  of  a  further  issue  was  very  remote,  the  Act  con- 
tained a  proviso  "  that  all  proceeds  of  certificates  of  indebtedness  shall  re- 
main a  constituent  part  of  the  Gold  Standard  Fund,  and  be  used  exclusively 
to  maintain  the  parity"  etc.     Of  course  the  proceeds  of  the  certificates  of  in- 
debtedness were  hopelessly  merged  with  the  other  constituents  of  the  Fund, 
and  it  would  have  been  utterly  impossible  to  distinguish  them  and  to 
determine  their  amount.     During  the  entire  period  of  the  withdrawal  of 
the  old  local  currency  from  circulation  from  1903  to  September  i,  1907, 
when  the  last  million  dollars  of  the  certificates  were  paid  off,  the  proceeds 
had   been   mingled   with    the   other   parts  of  the  Gold  Standard  Fund. 
Profits  had  been  realized  on  the  entire  Fund  from  1903  to  the  date  of  this  Act 
in  the  form  of  seigniorage,  premiums  on  exchange,  and  interest  on  bank 
credits  in  New  York.    The  object  of  this  provision  of  the  law  was  therefore 
merely  to  meet  pro  forma  the  requirement  of  the  Philippine  Coinage  Act  of 
Congress  (of  March  2, 1903)  which  declared  (section  6)  "  that  all  the  proceeds 
of  said  certificates  [of  indebtedness]  shall  be  used  exclusively  for  the  main- 
tenance of  said  parity  .  .  .  and  for  no  other  purpose"  (except   that  a 
limited  amount  might  be  used  as  a  continuing  credit  for  the  purchase  of 
silver). 

2B 


370  THE  PHILIPPINE  CURRENCY  REFORM 

With  the  segregation  of  a  fixed  35  per  cent  Gold  Stand- 
ard Fund  and  the  transference  of  the  balance  of  the  Fund 
to  the  general  treasury  funds  no  fault  should  be  found. 
Pursuant  to  this  provision  of  the  law,  P  4,856,720  were 
transferred  from  the  Gold  Standard  Fund  to  the  general 
funds  down  to  the  close  of  the  calendar  year  1913.*  Other 
provisions  of  this  law,  however,  and  of  an  earlier  executive 
order  to  be  described  later,2  are  open  to  serious  criticism, 
and  in  the  judgment  of  the  writer  clash  with  the  funda- 
mental principles  upon  which  the  gold-exchange  standard 
rests. 

The  provision  of  the  law  thus  open  to  criticism  is  that 
contained  in  section  3,  which  authorizes  the  Insular  Treas- 
urer, with  the  approval  of  the  Governor- General,  to  in- 
vest a  part  of  the  Gold  Standard  Fund,3  not  exceeding  one 
half,  "in  loans  for  periods  not  exceeding  ten  years  to 
provinces  and  municipalities  to  aid  in  the  construction  of 
public  works,  particularly  those  of  a  revenue-producing 
character,  at  three  per  centum  interest  per  annum :  Pro- 
vided, however,  that  one  half  of  such  fifty  per  centum  [of 
the  Fund  authorized  to  be  invested]  may  also,  with  the 
prior  approval  of  the  Governor- General,  be  invested  tem- 
porarily by  the  Insular  Treasurer  in  loans  on  approved 

1  Ann.  Rep.  Treas.  Phil.  Islands,  1913,  p.  22;    and  Rep.  Auditor  Phil. 
Islands,  semifiscal  year  ended  Dec.  31, 1913,  Part  I,  p.  93. 

2  Infra,  p.  372. 

3  An  earlier  step  toward  the  investment  of  part  of  the  Gold  Standard 
Fund  in  relatively  long-time  investments  was  made  by  Act  No.  2067  enacted 
July  24,  1911.     This  Act  authorized  the  Insular  Treasurer,  with  the  approval 
of  the  Governor-General,  to  invest  such  portions  of  the  accretions  of  the 
Gold  Standard  Fund  arising  from  interest  and  sale  of  exchange  as  the  popu- 
lation of  the  territory  inhabited  by  Moros  and  other  non-Christian  tribes 
under  the  exclusive  general  legislative  jurisdiction   of    the    Commission 
bears  to  the  total  population  of  the  Philippine  Islands.     The  investments 
could  be  made  in  loans  to  be  used  for  a  number  of  designated  purposes,  in- 
cluding loans  for  periods  not  exceeding  five  years  to  provinces  for  construc- 
tion of  public  works,  loans  of  a  type  eligible  for  the  investment  of  Philippine 
postal  savings  bank  funds,  and  in  the  purchase  of  first  mortgage  bonds  of 
corporations  organized  for  the  purpose  of  constructing  and  operating  sugar 
mills.     Cf.  Official  Gazette,  IX,  p.  1316. 


THE  GOLD  STANDARD  FUND          371 

security  to  the  Manila  Railroad  Company  to  complete 
[certain]  sections  of  railroad  ..."  enumerated  in  the  Act. 
The  interest  on  these  railroad  loans  was  fixed  at  5  per 
cent,  "and  the  time  for  the  total  payment  thereof  shall  not 
exceed  six  months  from  the  date  of  issue  of  the  bonds  of  the 
corresponding  twenty-mile  section,  and  in  no  case  shall 
exceed  thirty  months  from  the  date  of  the  loan." 

The  authorization  for  these  investments  was  promptly  ' 
taken  advantage  of,  and  by  the  close  of  the  calendar  year 
1913  the  investments  of  the  Gold  Standard  Fund  amounted 
to  P  7,646,876,  of  which  P  3,900,000  consisted  of  loans  to  the 
Manila  Railroad  Company,  and  the  balance  (P  3,746,876) 
of  loans  to  Philippine  provinces  and  municipalities.  At 
that  time  the  total  Fund,  representing  35  per  cent  of  the 
circulation,  amounted  to  P  18,402, 473, 1  so  that  one  may  say 
that  41  per  cent  was  in  the  form  of  investments,  57  per  cent 
in  the  form  of  cash  in  treasury  vaults  and  deposits  in  banks 
in  the  Philippines  and  in  the  United  States,  and  about  2 
per  cent  in  the  form  of  sundry  credits.2  This  means  a 
"cash"  reserve  (i.e.,  cash  in  vault  and  on  deposit  in  bank) 
of  about  20  per  cent,  a  reserve  which  can  administratively 
be  reduced  to  17^  per  cent,  and  for  the  reduction  of  which 
to  that  point  there  is  a  strong  pressure.  Furthermore,  the 
cash  and  deposited  proportion  of  the  Gold  Standard  Fund, 
as  compared  with  the  "invested"  proportion,  has  steadily 
declined  since  the  passage  of  the  Act  of  December  8,  i9ii.3  ' 

Several  years  before  the  enactment  of  these  two  laws  of 
1 91 1,4  authorizing  the  tying  up  of  portions  of  the  Gold 

1  Ann.  Rep.  Auditor  Phil.  Islands,  semifiscal  year  ended  Dec.  31,  1913, 
Part  I,  p.  93. 

2  About  P  312,000  was  represented  by  miscellaneous  items,    including 
monies  being  recoined  at  the  United  States   mints  and  accrued   interest 
(not  due).     Ibid. 

3  On  June  30, 1912  the  cash  and  deposited  part  of  the  Fund  represented  86 
per  cent  of  the  circulation,  and  the  invested  part  12  per  cent;    on  June  30, 
1913  the  corresponding  percentages  were  67  and  31;  and  on  December  31, 
1913  they  were  57  and  41  (as  given  above). 

4  Acts,  Nos.  2067  and  2083. 


372  THE  PHILIPPINE   CURRENCY  REFORM 

Standard  Reserve  fund  in  relatively  long-time  invest- 
ments, the  Philippine  Government  made  an  administrative 
departure  in  the  same  direction  from  the  fundamental 
principle  of  the  gold-exchange  standard  —  as  that  standard 
was  inaugurated  and  administered  during  the  first  four 
years  of  its  history  in  the  Philippines.  This  action  is 
logically  so  closely  related  to  the  legislation  of  1911  that  it 
can  best  be  considered  in  connection  with  that  legislation. 
It  provided  for  the  depositing  at  interest  in  Manila  banks  of 
Philippine  currency  belonging  to  the  Gold  Standard  Fund. 
The  following  figures  gathered  from  the  annual  reports 
of  the  Treasurer  of  the  Philippine  Islands,  1908-12,  will 
show  the  extent  of  this  practice.  On  June  30,  1908  the 
Philippine  currency  portion  of  the  Gold  Standard  Fund  in 
Manila  showed  an  overdraft  of  P  4,218, 573,  but  the  Fund 
had  an  interest-bearing  deposit  credit  in  the  Manila  banks 
of  P  800,000  ;*  on  June  30,  1909  the  Philippine  currency 
balance  of  the  Fund  in  Manila  was  P  824,622,  of  which 
P  800,000  was  deposited  at  interest  in  Manila  banks ; 2  on 
June  30,  1910  the  Philippine  currency  portion  of  the  Fund 
in  Manila  was  P  4,133,949,  of  which  P  1,701,500  represented 
fixed  interest-bearing  deposits  in  Manila  banks ; 3  on 
June  30,  1911  the  Philippine  currency  portion  of  the  Fund 
in  Manila  amounted  to  P  2,478,912,  of  which  P  1,096,000 
represented  a  fixed  deposit  in  Manila  banks  drawing  in- 
terest at  3!  per  cent.4  For  later  dates  the  figures  of  the 
Treasurer's  reports  are  not  in  such  a  form  as  to  permit  the 
separation  of  these  items.  The  1912  Report  showed  that 
the  interest  on  deposits  from  the  Gold  Standard  Fund  in 
Manila  banks  for  the  year  amounted  to  P  38,360 5  (as  com- 
pared with  P  54,809  for  the  year  1911) ;  and  the  1913  Re- 

1  Ann.  Rep.  Treas.  Phil.  Islands,  1908,  pp.  3  and  28.    The  heavy  over- 
drafts of  the  Fund  at  this  period  were  due  to  large  shipments  of  coin  to 
San  Francisco  for  recoinage. 

2  Ibid.,  1909,  pp.  4  and  23.  4  Ibid.,  1911,  pp.  6  and  22. 
8  Ibid.,  1910,  pp.  5  and  25.  5  Ibid.,  1912,  p.  7. 


THE  GOLD  STANDARD  FUND          373 

port  called  attention  to  the  fact  that  the  reduction  in  the 
interest  received  on  funds  in  authorized  depositories  was 
due  to  the  fact  that  "a  large  portion  of  the  Gold  Standard 
[Fund]  and  other  trust  funds  formerly  with  our  depositories 
is  now  employed  in  loans  and  other  more  profitable  forms 
of  investment,  the  interest  on  which  more  than  offsets  the 
decrease  herein  referred  to."  1  VThese  Gold  Standard  Fund 
investments,  taking  the  place  in  part  of  interest-bearing 
deposits  in  Manila  banks,  were  the  loans  to  the  Manila 
Railroad  Company  and  to  provinces  and  municipalities 
under  Authority  of  Act  No.  2083  previously  described.2 

These  investments  of  the  Gold  Standard  Fund  (including 
the  interest-bearing  deposits  in  Manila  banks)  are  con- 
trary to  the  fundamental  principles  upon  which  the  gold- 
exchange  standard  rests,  and,  although  so  far  apparently 
harmless,  sooner  or  later  they  are  likely  to  lead  to  unfortunate 
results. 

If  the  reader  will  recall  the  principle  of  the  gold-exchange 
standard  previously  explained,3  he  will  remember  that  the 
Philippine  currency  part  of  the  reserve  fund  was  to  be  kept 
in  Manila  in  the  treasury  vaults,  physically  withdrawn  from 
circulation,  and  that  the  gold  portion  was  to  be  kept  on 
deposit  in  New  York  banks.  When  exchange  in  Manila 
should  rise  to  the  gold-export  point,  evidencing  a  relative 
redundancy  of  currency  in  the  Philippines,  the  Govern- 
ment would  sell  drafts  at  the  gold-export-point  premium  on 
the  Gold  Standard  Fund  in  New  York,  withdrawing  from 
circulation  into  the  treasury  vaults  the  Philippine  currency 
received  in  payment  of  the  drafts,  and  thereby  relieving  the 
relative  redundancy  in  the  circulation  and  tending  to  force 
the  exchange  rate  back  toward  par  from  the  gold-export- 
point  premium.  On  the  other  hand,  when  exchange  should 
fall  to  the  gold-import  point,  evidencing  a  relative  scarcity 
of  currency  in  the  Philippines,  the  depository  banks  of  the 

1  Ibid.,  1913,  p.  7.  2  Supra,  pp.  370-71. 

8  Supra,  pp.  318-22. 


374  THE  PHILIPPINE  CURRENCY  REFORM 

Philippine  Government  in  New  York  would  sell  drafts  on 
the  Philippine  currency  portion  of  the  Gold  Standard  Fund 
in  the  Treasury  vaults  of  Manila,  charging  the  United  States 
currency-import-point  premium  for  the  Philippines,  and, 
on  presentation  of  these  drafts  at  the  treasury  in  Manila, 
Philippine  currency  would  be  withdrawn  from  the  treasury 
vaults  and  paid  to  the  holders  of  the  drafts,  thereby  in- 
creasing the  Philippine  circulation  and  relieving  the  rela- 
tive scarcity.  In  short,  this  Gold  Standard  Fund  was  to 
serve  both  as  a  reserve  fund  and  as  a  buffer  or  regulator 
fund.  Into  it  redundant  Philippine  currency  was  to  be 
drawn  and  out  of  it  currency  was  to  be  paid  to  meet  a  rela- 
tive scarcity.  The  mechanism  was  supposed  to  be  as  auto- 
matic as  is  the  outward  and  inward  flow  of  gold,  when  un- 
restrained, under  a  strict  gold  standard.  The  receipt  of 
Philippine  currency  into  the  Gold  Standard  Fund  in  Manila 
was  supposed  to  have  the  same  effect  upon  the  circulation 
as  the  exportation  of  a  proportionate  amount  of  gold  with- 
drawn from  the  circulation  would  have  in  a  country  like 
the  United  States ;  and  the  payment  of  Philippine  currency 
out  of  the  Fund  was  supposed  to  have  an  effect  like  the 
importation  of  gold.  There  was  practically  no  gold  in  cir- 
culation, silver  pesos  being  unlimited  legal  tender,  and  the 
Gold  Standard  Fund  thus  divided  between  Manila  and 
New  York  was  to  be  the  ultimate  reserve  of  the  entire  cur- 
rency system  —  a  guarantee  fund  and  a  regulator  fund. 

The  size  of  this  Fund  ought  primarily  to  be  determined 
by  the  probable  variations  in  the  currency  demands  of  the 
country.  If,  for  example,  the  currency  needs  of  the  Islands 
during  the  most  active  period  of  a  prosperous  year  were 
estimated  to  be  P  55,000,000,  and,  for  a  time  of  extreme  de- 
pression, say  P  45,000,000,  the  reserve  fund  would  need  to 
be  such  that  approximately  $5,000,000  could  be  paid  out 
in  New  York  in  case  of  emergency  to  enable  the  retire- 
ment of  P  10,000,000  in  the  Philippines ;  and,  on  the  other 
hand,  there  would  need  to  be  available  P  10,000,000  in  the 


THE  GOLD  STANDARD  FUND          375 

Philippines  to  meet  the  demands  for  an  expanding  cir- 
culation at  the  time  of  most  active  business.  Of  course 
the  Fund  should  be  large  enough  to  allow  a  generous  margin 
of  safety  over  and  above  all  needs  that  seem  reasonably 
probable.  Contrary  to  popular  belief,  the  size  of  the  reserve 
fund  needed  in  a  country  like  the  Philippines  has  very  little 
to  do  with  the  difference  between  the  bullion  value  and  the 
money  value  of  the  current  coins.1  It  is  not  a  question  of 
confidence  in  the  money,  but  one  of  adjusting  the  supply  of 
money  to  trade  demands  so  as  to  keep  the  country's  cur- 
rency and  its  price  level  in  equilibrium  with  those  of  other 
countries.  A  circulation  of  P  50,000,000,  each  peso  carry- 
ing as  much  as  98  per  cent  of  its  money  value  in  the  value 
of  its  silver  content,  would  require  a  large  reserve  if  the 
country  were  one  in  which  there  is  a  wide  range  in  the 
currency  needs  either  from  season  to  season  or  from  pros- 
perity to  depression ;  while  a  paper  currency  (of  which  the 
constituent  material  had  no  value  whatever)  issued  by  a 
strong  government  like  that  of  the  Philippines  could  get 
along  with  a  small  reserve,  provided  the  range  in  the 
currency  needs  were  a  narrow  one. 

Objection  to  Depositing  Part  of  Fund  in  Local  Banks 

Apply  these  principles  to  the  recent  Philippine  legislation. 
Of  what  use  is  P  1,000,000  of  the  Gold  Standard  Fund  on 
deposit  in  Manila  banks  as  a  means  of  regulating  the  cur- 
rency supply  to  trade  demands  ?  It  is  already  in  circula- 
tion. Surely  there  would  be  no  contraction  of  the  currency 
if  a  Manila  merchant  or  bank  should  buy  a  draft  from  the 

1  An  example  of  this  misconception  is  found  in  the  Report  of  the  Treasurer 
of  the  Philippine  Islands  for  1913  (p.  21),  where  the  Treasurer  says,  referring 
to  the  35  per  cent  reserve :  "In  other  words,  for  every  peso  in  circulation  or 
available  therefor,  there  has  been  set  aside  the  sum  of  1 7^  cents  United  States 
currency  to  make  up  the  difference  between  the  fluctuating  intrinsic  value  of 
the  Philippine  silver  peso  and  the  unit  of  value,  or  gold  peso,  worth  50 
cents  United  States  currency." 


376  THE  PHILIPPINE   CURRENCY  REFORM 

Government  on  the  Gold  Standard  Fund  in  New  York  for,  say, 
$50,000,  and  the  Government  should  deposit  the  P  100,000 
(plus  the  premium)  to  its  credit  in  a  Manila  bank.  The 
Government's  gold  fund  in  New  York  would  be  reduced 
by  $50,000,  but  the  currency  circulation  of  the  Philippines 
would  not  be  changed.  There  would  be  merely  a  transfer 
of  credits  on  the  books  of  the  bank.  If  the  purchase  money 
paid  to  the  Government  for  the  drafts  happened  to  be 
money  which  had  been  physically  withdrawn  from  active 
circulation,  the  result  would  be  in  the  direction  of  expan- 
sion instead  of  contraction,  since  when  this  money  was 
deposited  in  the  banks  by  the  Government  it  would  be- 
come bank  reserve  money  and  as  such  the  basis  of  loan  and 
deposit  expansion.  On  the  other  hand,  if  Manila  exchange 
should  be  at  the  currency-import  point  and  a  merchant  in 
New  York  should  buy  through  the  Philippine  Government's 
depository  bank  in  New  York  a  draft  on  the  Gold  Standard 
Fund  in  Manila  for  P  100,000,  and  if  the  draft  on  its  arrival  in 
Manila  should  be  paid  by  a  check  for  P  100,000  on  the  Gold 
Standard  Fund  in  a  Manila  bank,  this  would  not  act  like  an 
importation  of  Pi 00,000,  which  would  increase  the  circu- 
lation by  that  amount  and  thereby  relieve  the  scarcity. 
More  likely  it  would  result  in  a  transfer  of  a  P  100,000  bank 
deposit  credit  from  the  Government's  account  to  that  of 
the  merchant.  If,  as  is  likely,  the  merchant's  account  were 
the  more  active  (i.e.,  had  a  higher  rate  of  deposit  turnover 
than  the  Government's),  the  bank  would  be  required  to 
strengthen  its  reserve  and  the  net  result  would  be  the  con- 
traction of  the  currency  in  active  circulation  (outside  of 
bank  reserves)  rather  than  the  needed  expansion.1  Obvi- 
ously, therefore,  that  part  of  the  Gold  Standard  Fund 
kept  on  deposit  in  banks  in  the  Philippines  is  prevented 
from  performing  the  chief  function  of  the  Philippine  branch 
of  the  Gold  Standard  Fund,  i.e.,  the  function  of  auto- 

1  There  would  be  an  increase,  however,  in  the  average  rate  of  deposit 
turnover. 


THE  GOLD  STANDARD  FUND          377 

matically  regulating  the  currency  supply  to  the  demands  of 
trade. 

If  it  be  replied  that  the  sum  kept  on  deposit  is  .com- 
paratively fixed,  and  that  the  part  kept  in  the  treasury 
vaults  is  adequate  to  perform  the  function  of  the  regulator 
fund,  the  obvious  rejoinder  is  that  it  is  only  the  latter  part 
that  performs  that  function,  and  that  if  the  former  is  not 
needed  for  Gold  Standard  Fund  purposes,  it  should  be 
transferred  to  other  funds  where  it  is  needed.  There  is 
no  need  of  "a  secondary  Philippine  currency  reserve/'  and 
if  there  were,  such  deposits  would  not  constitute  a  good 
one;  for  in  times  of  monetary  stringency  the  withdrawal 
by  the  Government  of  large  fixed  deposits  from  the  banks 
would  be  a  sad  expedient  for  relieving  the  stringency. 

Objections  to  Loaning  Part  of  Fund 

That  part  of  the  Gold  Standard  Fund  —  legally  not  to 
exceed  50  per  cent  of  the  Fund  and  at  present  exceeding  40 
per  cent  —  which  is  invested  in  public  or  private  loans, 
according  to  the  provisions  of  Act  No.  2083,  *s  °f  even  less 
service  to  the  Philippine  currency  system,  peso  for  peso, 
than  is  the  part  on  fixed  deposit  in  Manila  banks ;  for  three 
of  the  four  depository  banks  in  the  Philippines  are  branches 
of  foreign  banks  (two  being  English  and  one  American) 
possessing  large  capitals  and  doing  an  extensive  business  in 
different  parts  of  the  Orient.  From  a  fiscal 1  point  of  view, 
it  is  difficult  to  imagine  an  emergency  in  which  they  could 
not  by  great  effort  meet  their  deposit  obligations  to  the 
Philippine  Government  in  a  reasonable  period  of  time. 

1  The  word  fiscal  is  used,  since  it  would  not  be  a  financial  failure  on  the 
part  of  the  banks,  but  a  monetary  failure  on  the  part  of  the  Philippine 
Government,  if  there  were  not  a  sufficient  supply  of  Philippine  currency  in 
the  Gold  Standard  Fund  in  Manila  with  which  to  honor  drafts  on  that 
Fund,  the  purchase  of  which  at  legal  rates  was  sought  by  the  New  York  offices 
of  these  banks  from  the  New  York  depositories  of  the  Philippine  Gold  Stand- 
ard Fund. 


378  THE  PHILIPPINE  CURRENCY  REFORM 

But  even  this  cannot  be  said  of  the  " invested"  portions  of 
the  Fund.  Clearly  this  invested  part  is  absolutely  function- 
less  as  a  regulator  fund.  Of  what  use,  moreover,  as  a  re- 
serve fund  in  a  country  like  the  Philippines  is  a  fund  in- 
vested in  ten-year  loans  to  provinces  and  municipalities  for 
capital  investments  in  public  works,  or  in  loans  for  ex- 
tensions of  a  Philippine  railway  system,  or  for  the  building 
of  sugar  mills  in  a  southern  province?  To  all  intents  and 
purposes,  theoretical  as  well  as  practical,  this  invested  por- 
tion of  the  Gold  Standard  Fund  is  functionless  as  a  mone- 
tary reserve,  and  it  is  a  misnomer  to  call  it  part  of  the 
Gold  Standard  Fund. 

If  in  reply  to  this  criticism  it  be  said  that  the  profits  on 
this  invested  portion  of  the  Fund  accrue  to  the  Fund  and 
help  to  maintain  it,  the  reply  is  that  these  profits  are  not 
needed  to  maintain  the  Fund,  inasmuch  as  not  only  these 
profits  but  a  large  part  of  the  profits  on  the  uninvested 
portion  of  the  Fund  are  being  turned  over  annually  to  the 
general  fund  of  the  treasury.1  Furthermore,  the  interest 
rate  realized  on  moneys  of  the  Gold  Standard  Fund  kept 
on  deposit  in  depository  banks  in  New  York  averages 
nearly  as  large  as  that  realized  on  these  Philippine  in- 
vestments. It  may  be  a  worthy  object  "to  keep  the 
money  at  home,"  and  encourage  the  development  of  use- 
ful public  works  in  the  provinces  and  municipalities  as 
well  as  the  building  of  sugar  mills  by  private  enterprise; 
but  that  is  no  function  for  the  country's  ultimate  currency 
reserve. 

Even  if  it  be  admitted  that  these  investments  might 
serve  as  a  sort  of  remote  secondary  reserve  for  the  coun- 

1  For  the  fiscal  year  1913  accumulated  profits  (representing  a  surplus 
over  the  35  per  cent  reserve  fixed  by  law)  of  the  Gold  Standard  Fund  amount- 
ing to  P  889,538  were  transferred  to  the  general  fund.  The  interest  on  loans 
to  provinces,  municipalities,  and  the  Manila  Railroad  Company  amounted 
to  only  P  134,850.  For  the  six  months  ending  Dec.  31,  1913  further  profits 
of  P  570,154  were  transferred  to  the  general  fund.  Ann.  Rep.  Treas.  Phil. 
Islands,  1913,  pp.  22-23;  and  Rep.  Sec.  Fin.  Justice,  1914,  p.  222. 


THE  GOLD  STANDARD  FUND         379 

try's  currency,  that  fact  would  not  justify  their  existence. 
No  remote  secondary  reserve  that  cannot  be  used  as  a  reg- 
ulator fund  is  needed.  The  Philippines  under  the  gold- 
exchange  standard  need  a  reserve  almost  exclusively  as  a 
regulator  fund,  and  an  amount  that  will  be  sufficient  for 
that  function  will  incidentally  be  adequate  as  a  guaranty 
of  the  currency's  gold  parity.  The  credit  of  the  Philip- 
pine Government  is  excellent,  and  there  is  no  lack  of  con- 
fidence in  its  currency.  Furthermore,  in  case  of  emergency, 
the  Philippine  Government  is  authorized,  for  the  main- 
tenance of  the  parity,  to  sell  gold  certificates  of  indebted- 
ness to  any  amount  not  exceeding  $i  0,000,000.*  Cer- 
tainly this  power  is  a  sufficient  guaranty  for  the  meeting 
of  remote  contingencies  in  the  case  of  a  currency  whose 
total  circulation  is  equal  only  to  approximately  $25,000,000. 

Suggested  Changes  in  Gold  Standard  Fund 

The  writer  believes  that  the  permanent  success  of  the 
gold-exchange  standard  in  the  Philippines  requires  that  the 
Gold  Standard  Fund  should  be  maintained  at  25  per  cent 
at  least  of  the  country's  entire  circulation,  and  preferably 
30  per  cent,  considering  the  experience  of  the  country  in 
1903  and  1910 2  and  that  of  India  in  1907  and  igoS.3  The 
reserve  should  be  divided  into  two  parts,  one  kept  chiefly 
in  the  form  of  Philippine  currency,  exclusively  in  the  Gov- 
ernment's vaults  in  the  Philippines ;  and  the  other,  in  the 
form  of  interest-bearing  deposits,  properly  distributed 
among  a  few  very  strong  •  banks  in  the  United  States 
—  banks  belonging  to  the  Federal  Reserve  System.  It 
would  be  well  for  the  Philippine  Government  promptly  to 
raise  its  cash  reserve  in  Manila  and  its  deposited  reserve 
in  New  York  in  the  aggregate  to  25  per  cent,  transfer  the 
invested  part  of  the  Gold  Standard  Fund  in  name,  as  it  is 
now  transferred  in  fact,  to  the  general  fund,  and  then 

1  Supra,  p.  315.  2 Supra,  pp.  367-68.  'Supra, pp.  113-33- 


380  THE  PHILIPPINE  CURRENCY  REFORM 

gradually  to  raise  the  reserve  through  accretions  of  annual 
profits  to  a  30  per  cent  basis. 

In  making  the  above  criticisms  it  is  not  intended  to 
give  the  impression  that  the  Philippine  currency  system  is 
at  present  in  any  real  danger.  Under  the  existing  condi- 
tions of  heavy  army  and  navy  payments  by  the  United 
States  in  the  Philippines,  with  the  large  transfers  of  credits  1 
between  the  United  States  and  Manila  to  which  they  give 
rise  every  year,  an  effective  exploitation  of  these  transfers, 
without  too  much  regard  for  fiscal  needs,  would  enable 
the  Philippine  Government  to  get  along  with  a  very  small 
reserve  fund  indeed.  In  fact,  during  the  years  1904  and 
1905,  and  1907  to  1909,  when  a  large  part  of  the  Gold 
Standard  Fund  was  continually  tied  up  in  recoinage  oper- 
ations, the  Government  maintained  the  parity  with  a  very 
small  working  balance  in  the  fund  —  often  in  fact  working 
upon  a  substantial  overdraft.2  Two  other  facts  may  assist 
the  Philippines  in  meeting  demands  upon  the  Gold  Stand- 
ard Fund :  (i)  One  is  the  authority  granted  by  the  Act  of 
Congress  of  June  23,  I9o63  to  the  Philippine  Government 

1  Supra,  pp.  368-69. 

2  At  the  end  of  the  fiscal  year  1905  the  effective  balance  of  the  Fund  in 
New  York  and  Manila  combined  was  but  P  7,368,704,  and  the  circulation  at 
that  time  was  approximately  P  28,000,000 ;  at  the  end  of  the  fiscal  year  1906 
the  effective  balance  was  PS, 669,3 75  and  the  circulation  was  approximately 
P  30,000,000.     In  1906  the  Government  sold  drafts  on  the  Fund  in  New 
York  to  the  equivalent  of  P  14,909,722.      At  the  end  of  the  calendar  year 
1907  the  effective  Fund  (i.e.,  the  part  not  tied  up  in  recoinage  operations) 
was  represented  by  an  overdraft  of  P  4, 89 1,5  05,  but  in  the  very  month 
(December  1907)  in  which  this  overdraft  existed  the  Government  sold  to 
banks  and  commercial  firms  in  the  Philippines  drafts  on  the  Gold  Standard 
Fund  in  New  York  to  the  equivalent  of  P  4,050,000.     The  average  working 
balance  of  the  Fund  for  the  twelve  months  of  the  fiscal  year  1908  (balances 
being  taken  for  the  last  day  of  each  month)  was  an  overdraft  of  P  2,343,390, 
while  the  drafts  on  the  Fund  in  New  York  sold  by  the  Government  to  banks 
and  commercial  firms  in  Manila  for  the  fiscal  year  1908  amounted  to  the 
equivalent  of  P  26,044,658,  and  in  1908  there  were  no  drafts  sold  in  New 
York  on  the  Fund  in  Manila  to  private  concerns.     Cf.  Ann.  Rep.  Treas. 
Phil.  Islands,  1908,  p.  29;  and  ibid.,  1913,  p.  25. 

3  Supra,  pp.  356-58. 


THE  GOLD  STANDARD  FUND          381 

to  substitute  for  silver  pesos  in  the  silver  certificate 
reserve  gold  coin  of  the  United  States  to  an  amount 
not  exceeding  60  per  cent  of  the  reserve.  At  the  close  of 
the  fiscal  year  1913  this  certificate  reserve  amounted  to 
P  3 1 , 568,43 1 .  Sudden  heavy  demands  for  increased  amounts 
of  Philippine  currency  in  the  Islands  could  therefore  be 
met  in  a  short  time  by  releasing  pesos  from  the  silver  certif- 
icate reserve  against  a  deposit  of  an  equivalent  amount  of 
United  States  gold  coin  brought  from  the  United  States. 
(2)  The  other  fact  is  that  United  States  paper  currency 
readily  circulates  in  the  Philippines  and  emergencies  could 
be  met  to  a  considerable  extent  by  the  importation  and 
exportation  of  this  money.1 

None  of  these  expedients,  however,  nor  all  of  them  to- 
gether, will  provide  a  permanent  and  satisfactory  substitute 
for  an  adequate  and  effective  reserve  fund.  Army  and  navy 
transfers  should  be  dictated  by  the  fiscal  necessities  of  the 
United  States  Government,  and  not  by  the  monetary  needs 
of  the  Philippines.  As  time  goes  on  the  amounts  of  these 
army  and  navy  transfers  are  likely  to  decline  absolutely, 
and,  as  the  trade  of  the  Islands  grows,  are  almost  certain 
to  decline  relative!}7  to  the  commercial  demands  for  gold 
standard  exchange.  Furthermore,  most  of  the  army  and 
navy  normally  stationed  in  the  Philippines  may  at  any 
time  be  called  away  by  military  exigencies,  and  these  very 
exigencies  which  would  remove  from  the  Philippine  Gov- 
ernment the  privilege  of  receiving  gold  credits  in  New  York 
in  exchange  for  Philippine  currency  (and  United  States 
currency)  credits  in  the  Philippines  might  at  the  same  time 
so  disturb  and  depress  Philippine  business  and  confidence 
as  to  result  in  very  heavy  demands  upon  the  New  York 
branch  of  the  Gold  Standard  Fund.  Moreover,  if  the 
United  States  is  ever  to  withdraw  permanently  from  the 
Philippines,  it  should  leave  the  Islands  a  fully  developed 
and  automatically  working  currency  system,  and  not  one  whose 
1  For  an  illustration  of  this  see  supra,  p.  356. 


382  THE  PHILIPPINE  CURRENCY  REFSRM 

props  will  be  knocked  from  under  it  by  the  very  act  of 
withdrawing  from  the  Islands.  The  substitution  of  gold 
coin  for  silver  pesos  in  the  silver  certificate  reserve  would 
be  an  expensive  procedure,  involve  sudden  demands  upon 
our  gold  supplies  at  home,  and  would  at  best  be  regarded 
as  a  temporary  and  emergency  expedient.  To  increase 
the  amount  of  United  States  currency  circulating  in  the 
Philippines  would  be  bad  policy.  It  would  result  in  the 
inconveniences  incident  to  a  dual  currency  and  would  in- 
terfere in  normal  times  with  the  smooth  and  automatic 
working  of  the  gold-exchange  standard.  The  quicker  the 
Philippine  currency  is  reestablished  on  the  basis  of  an  auto- 
matically working,  pure  gold-exchange  standard,  with  an 
adequate  reserve,  every  peso  and  dollar  of  which  is  func- 
tioning as  reserve,  the  better  for  the  Islands. 


APPENDIX   A 

UNWILLINGNESS  OF  THE  MANILA  BANKS  TO  RECEIVE 
UNITED  STATES  CURRENCY  DEPOSITS  FROM  THE  PUBLIC 

DURING  the  entire  period  of  the  Military  Government 
the  Manila  banks  refused  to  accept  deposits  of  United 
States  currency  from  individuals.  As  a  result,  an  army 
officer  or  soldier  receiving  his  pay  in  United  States  cur- 
rency and  wishing  to  keep  his  funds  on  deposit  in  a  bank 
was  compelled  to  sell  his  United  States  currency  to  the 
bank  for  local  currency  at  the  current  rate  and  deposit  the 
local  currency.  In  case  he  wished  to  get  United  States 
currency  from  the  bank  he  was  compelled  to  sell  his  local 
currency  credit  at  the  current  rate  for  United  States  cur- 
rency. There  was  always  a  substantial  difference  between 
the  banks'  buying  rate  for  United  States  currency  and  their 
selling  rate,  and  the  claim  was  repeatedly  made  that  the 
banks  had  an  understanding  between  each  other  for  the 
maintenance  of  highly  profitable  and  practically  non-com- 
petitive rates.  An  example  of  these  complaints  is  the 
following  from  a  letter  dated  May  9,  1899  written  by  the 
Chief  Paymaster  of  the  army  in  the  Philippines : 

"The  two  English  banks  of  Manila  seem  to  be  in  col- 
lusion, and  charge  exorbitantly  for  all  business  transacted 
over  their  counters.  When  an  officer  or  enlisted  man  goes 
to  deposit  his  gold  with  them  it  is  credited  to  his  account 
in  silver,  at  the  current  rate  —  for  this  is  a  silver  country  — 
and  if  he  wants  gold  for  any  purpose  they  charge  him  never 
less  than  5  per  cent  for  it.  I  have  noticed  that  when  pay 
day  approaches  the  banks  put  down  the  rate  for  gold,  so 
they  can  make  a  greater  profit  from  the  soldiers."  1 

1  Edwards,  p.  8. 


384  THE  PHILIPPINE   CURRENCY  REFORM 

The  banks,  on  the  other  hand,  maintained  that  the  fluc- 
tuations in  exchange  were  matters  of  the  world  markets 
and  entirely  beyond  their  control,  that  the  prices  they 
charged  were  entirely  reasonable,  and  that  the  demand 
for  United  States  currency  from  them  on  the  part  of  indi- 
viduals was  so  small  that  it  was  not  worth  their  while  to 
establish  separate  accounts  and  books  for  United  States 
currency  deposits.1 

The  materials  are  not  available  for  a  safe  judgment  on 
the  merits  of  this  controversy.  Such  evidence  as  we  have, 
however,  seems  to  justify  the  following  conclusion.  Very 
early  the  banks  provided  facilities  for  gold  deposits  on  the 
part  of  officers  charged  with  the  handling  of  public  funds,2 
and  the  needs  of  individuals  for  the  making  of  United 
States  currency  deposits  were  not  great.  Army  officers  and 
soldiers  desiring  to  transfer  funds  home  could  purchase  of 
the  army  paymaster  drafts  at  par  on  the  United  States 
subtreasuries,  and  the  pay  departments  offered  to  soldiers 
facilities  for  interest-bearing  savings  accounts  in  United 
States  currency.  For  retail  expenditures  in  the  Philippines 
local  currency  was  the  money  in  almost  univeral  use. 
Furthermore,  many  of  the  criticisms  urged  against  the 
banks  showed  a  profound  ignorance  with  regard  to  cur- 
rency and  exchange  conditions  in  the  Orient.3 

1  Cf.  letter  defending  Manila  banks  written  to  the  Secretary  of  War  by 
the  New  York  Agency  of  the  Canadian  Bank  of  Commerce.     The  letter  was 
written  at  the  request  of  the  Chartered  Bank  of  India,  Australia,  and  China. 
Edwards,  pp.  48  and  49. 

2  General  Otis  in  a  letter  of  August  31,  1899  wrote :  "  For  a  long  time  .  .  . 
[the  banks]  allowed  [Pfs.]  2  silver  for  $i  in  gold,  but  recently  have  arranged 
for  receiving  gold  deposits  from  disbursing  officers  on  account  and  to  make 
payments  thereon  in  gold."     Ibid.,  p.  36. 

8  For  example,  criteria  frequently  cited  as  to  what  constituted  a  fair  basis 
for  computing  rates  were :  sterling  exchange  rates  in  Hongkong,  the  Secre- 
tary of  the  Treasury's  quarterly  rate  for  the  bullion  value  of  the  Mexican 
dollar,  and  the  bullion  value  of  the  Mexican  dollar  at  the  current  London 
price  of  silver.  As  a  matter  of  fact  Hongkong  exchange  was  quoted  in 
terms  of  the  sterling  value  of  the  "Hongkong  dollar,"  and  "clean  Mexican 
dollars  "  (i.e.,  unchopped  dollars)  of  the  type  circulating  in  the  Philippines 


APPENDIX  A  385 

On  the  other  hand  it  must  be  said  that  the  action  of  the 
banks  was  shortsighted  and  selfish.  They  were  foreign 
banks,  the  Government  was  a  military  government  for 
most  of  the  period  of  the  controversy,  the  time  was  one  of 
war  or  near-war,  and  the  people  chiefly  concerned  were 
soldiers.  Under  such  circumstances  it  would  be  difficult 
to  imagine  a  surer  way  to  arouse  antagonism  than  to  dis- 
criminate against  the  ruling  country's  currency.  Since  the 
banks  handled  United  States  currency  deposits  for  dis- 
bursing officers,  it  would  have  involved  little  additional 
trouble  and  expense  to  accept  the  few  United  States  cur- 
rency deposits  offered  by  individuals.  The  chief  reason 
for  their  unwillingness  to  do  so,  the  writer  is  convinced,  was 
not  the  additional  expense  of  handling  such  accounts,  but 
the  loss  of  profits  on  exchange. 

On  November  28,  1900  the  Philippine  Commission  passed 
a  law1  "to  prevent  discrimination  against  money  of  the 
United  States  by  banking  institutions."  The  first  section 
of  the  law  required  that:  "Every  bank  of  deposit  in  the 
Philippine  Islands  shall  accept  deposits  both  in  the  money 
of  the  United  States  and  in  Mexican  or  other  local  money, 
and  shall  honor  checks  on  or  repay  such  deposits  in  the 
kind  of  money  in  which  they  are  made."  The  only  note- 
worthy feature  of  this  measure  is  that  it  was  not  adopted 
two  years  before  by  a  general  order  of  the  Military  Govern- 
ment. 

were  generally  at  a  substantial  premium  in  Hongkong.  The  Secretary  of 
the  Treasury's  rate  represented  an  average  rate  for  a  three  months'  period 
in  the  past,  and  was  obviously  not  a  fair  basis  for  current  values  in  the  Philip- 
pines. There  were  substantial  charges  incident  to  the  coinage  of  Mexican 
dollars  and  their  exportation  from  Mexico,  and  since  the  distance  of  Manila 
from  London  or  Mexico  was  great,  there  was  a  very  tardy  response  of  the 
monetary  supply  in  the  Philippines  to  the  ups  and  downs  of  the  bullion 
value  of  the  Mexican  dollar  in  those  countries.  The  gold  value  of  the 
Mexican  dollar  in  the  Orient  as  measured  by  the  gold  exchanges  frequently 
varied  as  much  as  3  or  4  per  cent  on  either  side  of  "  bullion  par." 
1  Report  of  Taft  Philippine  Commission,  1900,  p.  322, 

2G 


APPENDIX  B 

BIBLIOGRAPHY  ON  PHILIPPINE  CURRENCY  REFORM 

AGUILAR  Y  BIOSCA,  D.  F.,  Recopilador.  Legislacion  sobre  Moneda 
Filipina.  Intendencia  de  Hacienda.  Manila,  1893. 

BANCO  ESPANOL  FILIPINO.  Estatutos.  Real  Decreto  de  1896. 
Manuscript  in  Bureau  of  Archives,  Manila. 

BLAIR,  E.  H.,  and  ROBERTSON,  J.  A.  The  Philippine  Islands,  1492- 
1898.  55  volumes.  Cleveland,  Ohio:  Arthur  H.  Clark  Company. 

Bureau  of  Insular  Affairs,  War  Department.  Annual  Reports,  1902- 
14.  Washington:  Superintendent  of  Documents. 

.     Quarterly  Summary  of  Commerce  of  the  Philippine  Islands. 

Passim.    Washington:  Superintendent  of  Documents. 

Bureau  of  Statistics,  Department  of  Commerce  and  Labor.  The 
Commercial  Philippines  in  1906,  Showing  the  Trade  of  the 
Islands,  the  Chief  Countries  Participating  therein,  the  Principal 
Articles  Imported  and  Exported,  and  Details  of  Trade  of  the 
United  States  with  the  Islands,  during  a  Term  of  Years.  Wash- 
ington: Superintendent  of  Documents,  January  1907. 

CHALMERS,  ROBERT.  A  History  of  Currency  in  the  British  Colonies. 
London:  Eyre  &  Spottiswoode,  1893. 

Commission  on  International  Exchange.  Gold  Standard  in  Inter- 
national Trade.  Report  on  the  Introduction  of  the  Gold-Ex- 
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Silver  Using  Countries,  and  on  the  Stability  of  Exchange. 
Washington:  Superintendent  of  Documents,  1904. 

.  Stability  of  International  Exchange.  Report  on  the  Intro- 
duction of  the  Gold-Exchange  Standard  into  China  and  Other 
Silver  Using  Countries.  House  Document,  No.  144,  58th 
Congress,  2d  Session,  1903. 

CONANT,  CHARLES  A.  A  Special  Report  on  Coinage  and  Banking  in 
the  Philippine  Islands  Made  to  the  Secretary  of  War,  November 
25,  1901.  Washington:  Superintendent  of  Documents,  1901. 

.  The  Currency  of  the  Philippine  Islands.  Annals  of  the  Ameri- 
can Academy  of  Political  and  Social  Science,  1902. 

386 


APPENDIX  B  387 

EDWARDS,  CLARENCE  R.,  Compiler.    Currency  and  Exchange  in  the 

Philippines.    House  Miscellaneous  Documents,  LXXIV,  Nos. 

151-228.     56th  Congress,  2d  Session,  1900-01. 
El  Comercio.    Daily  Newspaper.     Manila,  1903-06. 
GARCIA-PATON,  FEDERICO.    La  Fabricacion  de  las  Monedas.    Ma- 
drid: Tipografia  de  J.  Benito  Cerezo,  1903. 
HARDEN,  EDWARD  W.    Report  to  the  Secretary  of  the  Treasury  on 

the  Financial  and  Industrial  Conditions  of  the  Philippine  Islands. 

Washington:  Superintendent  of  Documents,  1898. 
HENNICKE,  ALFRED.    Die  Entwicklung  der  Spanische  Wahrung  von 

1868-1906.    Stuttgart  &  Berlin:  J.  G.  Cotta'sche  Buchhandlung 

Nachf.,  1907. 
JENKS,  JEREMIAH  W.     Currency  Problems  in  the  Orient.     Papers 

and  Proceedings  of  the  Fifteenth  Annual  Meeting  of  the  Amer- 
ican Economic  Association.    December  1902. 
.    Report  on  Certain  Economic  Questions  in  the  English  and 

Dutch  Colonies  hi  the  Orient.    Washington:  Superintendent  of 

Documents,  1902. 
KEMMERER,  E.  W.    First  Annual  Report  of  the  Chief  of  the  Division 

of  the  Currency  of  the  Philippine  Islands.    Manila:  Bureau  of 

Public  Printing,  1904. 
.    Second  Annual  Report  of  the  Chief  of  the  Division  of  the 

Currency  of  the  Philippine  Islands.    Manila :  Bureau  of  Public 

Printing,  1905. 
.    The  Establishment  of  the  Gold-Exchange  Standard  in  the 

Philippines.     Quarterly  Journal  of  Economics,  XIX,  1905. 
.    The  Recent  Currency  Reform  in  the  Philippines.    A  Paper 

Read  at  the  First  Pan-American  Scientific  Congress  in  Rio,  Brazil, 

1907.    Printed  by  the  Congress. 
.    The  Recent  Rise  hi  the  Price  of  Silver  and  Some  of  its  Monetary 

Consequences.     Quarterly  Journal  of  Economics,  XXVI,  1912. 
.     Money  and  Credit  Instruments  hi  their  Relation  to  General 

Prices.    Second  Edition.    New  York:  Henry  Holt  &  Co.,  1909. 

Especially  Book  I,  Chapter  5. 
LEROY,  JAMES  A.    Philippine  Life  in  Town  and  Country.    New  York : 

G.  P.  Putnam's  Sons,  1906. 
.    The  Americans  in   the   Philippines.    Two   volumes.    New 

York :   Houghton  Mifflin  Company,  1914. 
Manila  American.    Daily  Newspaper.     Manila,  1903-05. 
Manila  Cablenews.    Daily  Newspaper.     Manila,  1903-06. 
Manila  Times.    Daily  Newspaper.     Manila,  1901-06. 
Ons,  E.  S.    Annual  Report  of  the  Major-General  Commanding  the 

Department  of  the  Pacific  and  the  Eighth  Army  Corp,  and  Mili- 


388  THE  PHILIPPINE   CURRENCY  REFORM 

tary  Governor  of  the  Philippine  Islands.    August  31, 1899.    House 

Document,  V,  56th  Congress,  ist  Session. 

Philippine  Government.    Annual  Reports  of  the  United  States  Philip- 
pine Commission  from  the  Report  of  the  Schurman  Commission 

in  1900  to  Report  of  1914. 
.    Annual  Reports  of  the  Auditor  of  the  Philippine  Islands. 

1901-14.     Manila:  Bureau  of  Public  Printing. 
.     Annual  Reports  of  the  Chief  of  the  Division  of  the  Currency 

of  the  Philippine  Islands.     1904  and  1905.     Manila:   Bureau  of 

Public  Printing. 
.    Annual  Reports  of  the  Secretary  of  Finance  and  Justice. 

1901-14.     Manila:  Bureau  of  Public  Printing. 
— .    Annual  Reports  of  the  Treasurer  of  the  Philippine  Islands. 

1906-14.     Manila:  Bureau  of  Public  Printing. 
.    Executive    Orders    and    Proclamations.     Annual.     Manila: 

Bureau  of  Public  Printing. 
.     Official  Gazette  of  the  Philippine  Islands.    Weekly.     1902- 

14.     Manila:  Bureau  of  Public  Printing. 

Philippine  Islands.     Census,    1903.     Four   volumes,  especially  vol- 
ume IV.    Washington:   Bureau  of  the  Census,  1905. 
PIXLEY  and  ABELL,  Compilers.     A  Table  Showing  the  Monthly  Fluc- 
tuations in  London  in  the  Price  of  Bar  Silver  per  Ounce  Standard 

from  January  1833  to  the  Present  Time.     Annual.     London: 

Pixley  and  Abell,  Bullion  Brokers 
ROOT,  L.   CARROLL.    The  Currency  Question  in  the  Philippines. 

Sound  Currency,  March  1901. 
ROSCHER,  W.    Kolonien,  Kolonialpolitik  und  Auswanderung.     Third 

Edition.    Leipzig:    1885.     See  also  English  Translation  by  E. 

G.  Bourne  under  title  of  The  Spanish  Colonial  System.     New 

York:  1904. 
Secretary    of    War.     Annual    Reports.     1898-1914.    Washington: 

Superintendent  of  Documents. 
United  States  Military  Governor  of  the  Philippine  Islands.     Special 

Orders,    General    Orders    and    Circulars,    1900.     Washington: 

Superintendent  of  Documents. 

See  also  bibliography  on  Indian  Currency  Reform,  supra,  pp.  149-52. 


PART  IV 

THE   STRAITS   SETTLEMENTS   CURRENCY 
REFORM l 


1  This  paper  is  based  upon  three  previously  published  articles  by  the 
author  relating  to  this  subject.  They  are :  A  Gold  Standard  for  the  Straits 
Settlements,  I  and  II,  in  Political  Science  Quarterly,  XIX,  1904,  pp.  630-649; 
and  XXI,  1906,  pp.  663-698;  and  The  Recent  Rise  in  the  Price  of  Silver 
and  Some  of  Its  Monetary  Consequences,  in  Quarterly  Journal  of  Economics, 
XXVI,  1912,  pp.  254-261.  These  articles  have  been  revised  and  supple- 
mented. The  author  is  under  obligation  to  the  publishers  for  permission 
to  use  the  material  in  this  volume. 


CHAPTER  I 

THE  STRAITS  SETTLEMENTS  CURRENCY  PRIOR  TO  THE 
REFORM  or  1903 

AMONG  the  oriental  countries  recently  to  undertake  the 
adoption  of  a  gold  standard  currency  is  the  Straits  Settle- 
ments. This  British  colony,  composed  of  Singapore,  Pe- 
nang,  Malacca,  and  their  dependencies,  is  one  of  the  great 
entrepots  of  the  shipping  trade  of  the  Orient.  Like  most 
eastern  countries  it  has  had  a  varied  monetary  experience.1 
The  tin  "pice,"  the  various  kinds  of  silver  rupees,  the 
Dutch  rix  dollar,  the  Japanese  copang,  the  Carolus  dollar 
of  Spain,  the  Mexican  and  British  dollars  and  their  kin- 
dred South  American  coins,  as  well  as  sterling  coins  and 
money  coined  by  the  Straits  Settlements  themselves,  have 
all  had,  at  one  time  or  another,  a  wide  circulation  in  the 
Malay  Peninsula.  From  early  in  the  sixteenth  century 
until  the  present  time,  however,  in  spite  of  several  attempts 
to  displace  it,  the  principal  medium  of  exchange  and  the 
real  money  of  account  of  the  Straits  Settlements  has  been 
the  old  Spanish  dollar  or  some  of  its  illustrious  descendants 
like  the  Mexican  and  British  dollars. 

In  1867,  the  year  of  the  transfer  of  the  Straits  Settle- 
ments from  the  control  of  the  Indian  Government  to  that 
of  the  Secretary  of  State  for  the  Colonies,  an  ordinance  was 
passed  repealing  all  laws  making  Indian  coins  legal  tender 
and  declaring  that,  after  April  i  of  that  year,  "the  dollar 

*A  brief  treatment  of  the  earlier  history  of  the  Straits  Settlements 
currency  is  given  in  Chalmers,  chap.  38. 


392    THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 

issued  from  her  Majesty's  mint  at  Hongkong,  the  silver 
dollar  of  Spain,  Mexico,  Peru,  and  Bolivia,  and  any  other 
silver  dollar  to  be  specified  from  time  to  time  by  the  Gov- 
ernor in  Council,  shall  be  the  only  legal  tender,'1  with  the 
exception  of  certain  subsidiary  coins.1  Since  1871  sub- 
sidiary coins  for  the  Straits  Settlements  have  been  struck 
by  the  royal  mints.  An  order  in  council  dated  October 
21,  1890  repealed  all  previous  laws  with  reference  to  legal 
tender  in  the  Colony  and  declared  the  Mexican  dollar  the 
standard  of  value,  at  the  same  time  giving  unlimited  legal 
tender  to  the  Japanese  yen,  the  Hongkong  dollar  and  half- 
dollar,  and  the  American  trade  dollar.  Prior  to  the  pas- 
sage of  the  currency  law  of  1903  two  subsequent  orders  in 
council  of  importance  relative  to  the  currency  were  issued 
under  dates  of  February  2,  1895  and  October  20,  1898. 
These  orders  taken  together  removed  the  legal  tender 
quality  from  the  American  trade  dollar  and  the  Japanese 
yen,  reaffirmed  the  law  making  the  Mexican  dollar  the 
standard  coin,  and  declared  that  the  Hongkong  dollar  and 
the  recently  coined  British  dollar  should  be  legal  tender 
and  be  treated  as  equal  to  the  standard  dollar.  The 
Straits  currency  thus  established  was,  with  a  slight  modi- 
fication, adopted  by  the  Federated  Malay  States. 

At  the  beginning  of  the  calendar  year  1903  the  actual 
currency  of  the  Straits  Settlements,  the  Federated  Malay 
States,  and  Johore  was  roughly  estimated  as  follows : 2 

(1)  About  thirty  million  British  and  Mexican  dollars,  of 
which  by  far  the  larger  part  was  British  dollars,  and  of 
which  nearly  a  third  represented  coin  held  in  reserve  against 
the  Government's  note  issue. 

(2)  About  six  million  seven  hundred  thousand  dollars 
of  Straits  Settlements  subsidiary  coins. 

(3)  An  unknown  amount  of  copper  coins,  the  remainder 
of  a  total  coinage  since  1871  officially  stated  at  1,887,500 

1  Straits  Settlements  Currency  Committee,  Report  of  1903,  pp.  4  and  5. 

2  Ibid.,  pp.  5  and  6. 


CURRENCY  PRIOR  TO  REFORM  OF   1903  393 

dollars    (nominal),    of  which  large   quantities   had   been 
shipped  out  of  the  country. 

(4)  About  thirteen  million  dollars  of  government  notes. 

Dissatisfaction  with  Silver  Standard 

The  effect  of  the  fall  in  the  gold  price  of  silver  from 
1873  to  1893  was  similar  in  the  Straits  Settlements  to  what 
it  was  in  India,1  Mexico,2  and  the  other  silver  standard 
countries  of  the  world  which  had  extensive  trade  relations 
with  gold  standard  countries.  The  evils  resulting  to  local 
business  from  the  rapidly  falling  and  fluctuating  exchange 
with  gold  standard  countries  finally  became  so  serious  in 
1893,  after  the  closing  of  the  Indian  mints  and  the  call- 
ing of  the  extra  session  of  the  Congress  of  the  United 
States  to  consider  the  repeal  of  the  Sherman  Silver 
Purchase  Act,  that  the  British  Colonial  Secretary  tele- 
graphed to  the  Governor  of  the  Straits  Settlements  for  a 
report  as  to  possible  remedial  measures  in  the  direction  of 
securing  for  the  Colony  greater  stability  of  exchange.  In 
response  to  this  telegram  a  special  committee  was  ap- 
pointed by  the  Governor  to  investigate  local  monetary 
conditions  and  to  suggest  remedial  measures.  The  com- 
mittee examined  a  considerable  number  of  witnesses, 
whom  they  considered  "fair  representatives  of  the  think- 
ing men  of  the  Colony  of  all  classes,"  and  found  that,  with 
the  exception  of  the  majority  of  the  Chinese  traders,  the 
witnesses  examined  were  "  mostly  in  accord  in  declaring 
that  the  fall  in  exchange  has  been  disadvantageous  to  these 
Settlements."  In  spite  of  this  fact,  however,  the  com- 
mittee was  unable  to  agree  upon  any  proposition  favoring 
the  introduction  of  the  gold  standard,  and  their  report  was 
divided.  Half  of  the  twelve  members  of  the  committee 
favored  a  gold  standard,  five  of  them  advocating  the  in- 
troduction of  the  rupee  upon  the  plan  which  had  at  that 

1  Supra,  pp.  14-32.  *  Infra,  p.  472. 


394    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

time  but  recently  been  adopted  by  India,  provided,  how- 
ever, that  that  plan  should  prove  a  success  in  India.  The 
other  half  of  the  committee,  including  all  the  native  mem- 
bers, favored  a  continuation  of  the  silver  standard.1 


Currency  Reform  Plan  of  Singapore  Chamber  of  Commerce 

From  1893  to  1897  there  was  considerable  agitation  and 
newspaper  discussion  in  the  Straits  Settlements  concern- 
ing the  advisability  of  adopting  a  gold  standard,  but  noth- 
ing came  of  it  until  1897,  when  on  August  25  a  committee 
of  the  Singapore  Chamber  of  Commerce,  by  a  unanimous 
vote,  adopted  a  resolution  favoring  the  establishment  of 
a  fixed  par  of  exchange  with  gold  countries,  and  appointed 
a  sub-committee  "to  enquire  into  the  local  currency  with 
the  view  of  calling  attention  of  Government  to  the  question 
of  converting  the  Straits  currency  to  a  gold  standard." 

The  essence  of  the  recommendations  of  this  sub-com- 
mittee may  be  summed  up  as  follows : 2 

(a)  The  Government  was  to  adopt  the  English  sovereign 
as  the  basis  of  the  new  currency  "with  a  Straits  dollar  — 
fixed  at  the  value  of  25.  —  subsidiary  to  it,"  and  the  exist- 
ing subsidiary  silver  coinage  was  to  be  continued  unchanged 
except  for  being  placed  upon  a  gold  basis. 

(b)  The  Government  was 

"not  to  let  its  intention  be  known,  and,  when  a  decision  .  .  . 
[was  reached,  was]  to  pass  a  law  at  one  sitting  of  the  legisla- 
tive council,  and  immediately  thereafter  issue  a  notification 
to  the  effect  that  during  a  term  sufficiently  brief  to  prevent 
importation,  all  dollar  coins  then  legally  current  in  the 
colony  would  be  received  at  certain  specified  places  and 
government  currency  notes  given  in  exchange;  and  that, 

1 A  copy  of  the  report  of  this  committee  is  given  in  Appendix  xvi  of  the 
Minutes  of  Evidence  and  Appendices  of  the  Straits  Settlements  Currency 
Committee's  Report. 

2  Ibid.,  App.  xvii. 


CURRENCY  PRIOR  TO  REFORM  OF   1903  395 

after  the  expiry  of  such  term,  the  British,  Mexican,  and 
other  dollars  in  circulation  would  be  demonetized." 

The  Federated  Malay  States  were  to  promulgate  the  same 
law  simultaneously. 

(c)  From  the  stock  of  silver  obtained  by  the  Government 
from  its  exchange  of  notes  for  British  and  Mexican  dollars 
a  limited  supply  of  the  new  two-shilling  dollars  was  to  be 
coined,  these  dollars  to  contain  an  amount  of  silver  of 
from  sixty  to  seventy  per  cent  of  that  contained  in  the 
British  and  Mexican  dollars,  the  seigniorage  to  accrue  to 
the  gold  reserve. 

Nothing  of  any  consequence  in  the  way  of  monetary 
reform  developed  from  the  above  plan.  It  was  severely 
criticized  by  the  Governor,  by  the  President-General  of 
the  Federated  Malay  States,  and  by  many  others  in  high 
position.1  This  criticism  was  based  on  the  following 
grounds : 

(1)  The  expense  involved  in  maintaining  such  a  fiduciary 
coin  at  a  two-shilling  value  and  in  exchanging  the  new 
dollar  for  the  old  one. 

(2)  The  danger  of  counterfeiting,  which  in  the  Orient  was 
believed  to  be  great  in  the  case  of  coins  like  the  ones  pro- 
posed, whose  nominal  value  was  so  far  above  their  bullion 
value.2 

(3)  The  difficulty  of  the  Government's  keeping  its  in- 
tentions secret  until  the  final  passage  of  the  law ;   and,  on 
the  other  hand,  if  the  public  were  notified  in  advance,  the 
danger  of  an  inundation  of  British  and  Mexican  dollars,  to 
take  advantage,  either  legally  or  illegally,  of  the  two-shil- 
ling dollar  exchange  offered. 

(4)  The  difficulty  of  inducing  the  natives,  who  were  ac- 
customed to  judge  the  value  of  a  coin  by  its  weight,  to 

1  Ibid.,  App.  xxviii,  No.  12.    See  also  Appendix  No.  54  of  the  Index  and 
Appendices  to  the  Evidence  Taken  before  the  Committee  Appointed  to 
Enquire  into  the  Indian  Currency,  1899,  i.e.,  "The  Fowler  Committee." 

2  Cf.  supra,  p.  305. 


396    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

take,  at  a  higher  value,  a  coin  of  a  little  more  than  half  the 
weight  of  the  one  to  which  they  were  accustomed. 

(5)  The  difficulty  of  inducing  the  native  holders  of  the 
old  dollars,  especially  those  of  the  Federated  Malay  States, 
to  exchange  them  for  a  paper  currency  with  which  they 
were  not  familiar. 

As  a  result  of  these  and  other  similar  objections  nothing 
came  of  the  proposed  plan. 

The  Straits  Settlements  Currency  Committee 

Its  rejection  gave  a  quietus  to  the  subject  of  a  gold 
standard  for  the  Straits  Settlements,  as  far  as  any  official 
action  was  concerned,  until  the  middle  of  1902.  On  June 
9,  1902  the  Singapore  Chamber  of  Commerce  again  ad- 
dressed a  letter  to  the  Colonial  Government  asking  whether 

"  in  view  of  the  recent  serious  decline  in  the  value  of  the 
dollar  current  here,  the  violent  fluctuations  in  the  price  of 
silver  and  the  extreme  uncertainty  as  to  the  future  of  this 
metal,  all  of  which  are  not  only  causing  great  inconvenience 
to  the  trade  of  the  Colony  but  constitute  grave  obstacles  to 
the  development  of  its  natural  resources  by  stopping  the 
flow  of  capital  from  other  parts  of  the  world," 

[the  Government  were  prepared  to  investigate  into]  "the 
feasibility  and  expediency  of  securing  fixity  of  exchange. "  l 
This  letter,  together  with  certain  subsequent  communica- 
tions upon  the  subject,  was  forwarded  to  the  colonial  sec- 
retary in  July. 

The  result  of  these  communications  was  that  a  com- 
mittee composed  of  Sir  David  Barbour,  Mr.  W.  Adamson, 
Mr.  G.  W.  Johnson,  and  Mr.  W.  Elaine  was  appointed  by 
the  Secretary  of  State  for  the  Colonies  to  consider : 

(i)  "  The  expediency  ...  of  introducing  a  gold  stand- 
ard of  currency  in  the  Straits  Settlements  and  the  neigh- 
boring Malay  States ;  [and]  (2)  the  practicability  of  making 

1  S.  S.  Cur.  Com.  Rep.,  p.  7. 


CURRENCY  PRIOR  TO   REFORM  OF   1903  397 

the  change  and  the  steps  which  in  the  opinion  of  the  Com- 
mittee should  be  taken  to  effect  this  object  if  the  change 
should  be  decided  upon."1 

The  Committee  began  its  hearings  in  London,  November 
13,  1902,  and  continued  taking  testimony  until  about  Feb- 
ruary i,  1903.  During  that  time  a  mass  of  testimony  both 
verbal  and  written  was  taken.  The  Committee's  sittings 
having  been  in  London,  it  was  necessary  that  the  greater 
part  of  the  testimony  should  be  that  of  English  merchants 
having  trade  experience  with  the  Straits  Settlements  or 
with  the  East  generally  —  the  class  of  persons  who,  it  will 
be  noted,  naturally  would  have  been  most  favorable  to  the 
establishment  of  a  gold  standard.  The  masses  of  the  popu- 
lation, represented  by  the  natives,  and  by  the  Chinese,  who 
do  a  large  part  of  the  business  of  the  Straits  Settlements 
and  of  the  Federated  Malay  States,  could  not  be  heard 
directly ;  while  through  petitions  and  resolutions  they  took 
comparatively  little  part  in  the  controversy  —  in  fact  they 
were  for  the  most  part  ignorant  of  the  entire  matter.  On 
the  whole  the  evidence  is  that  the  weight  of  opinion 
among  the  more  intelligent  of  these  classes  was  on  the  side 
of  maintaining  the  status  quo.  The  European  community, 
with  the  exception  of  most  of  the  bankers  and  of  a  consider- 
able number  of  exporters,  were  almost  a  unit  in  favor  of  a 
gold  standard. 

A  detailed  discussion  of  the  evidence  brought  forth  in 
this  testimony  and  published  in  the  minutes  of  the  Com- 
mittee's report  is  not  necessary.  The  report  of  the  local 
committee  appointed  in  1893  to  consider  the  subject  of  the 
Straits  currency  declared  that  "all  the  effects  remarked  on 
in  paragraphs  21-28  of  the  report  of  Lord  Herschell's  Com- 
mittee are  in  operation  in  the  Straits."  This  statement 
was  nearly  as  true  in  1903  as  in  1893.  A  few  salient  fea- 
tures of  the  conditions  leading  to  the  legislation  of  1903 
may,  however,  briefly  be  mentioned. 

'Ibid.,  p.  3. 


398    THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 

Instability  of  Exchange 

The  annual  fluctuations  in  the  gold  value  of  the  local 
money  during  the  period  1891  to  1901  are  shown  in  the 
following  table.1 

RATES  FOR  BANK  BILLS  ON  LONDON 
(Four  Months  Sight) 


YEAR 

HIGHEST 

LOWEST 

AVERAGE 

RANGE 

s.    d. 

s.     d. 

5.     d. 

Per  Cent 

1891 

3  6t 

3     if 

3     3 

Hi 

1892 

3   if 

2     9* 

2    IO| 

"I 

1893 

2    9f 

2     4* 

2       7f 

isi 

1894 

2    3* 

2     of 

2       if 

i3TV 

1895 

2    3lV 

i    n| 

2       I* 

7f 

1896 

2    3 

2       I 

2       2* 

i6i 

1897 

2    lit 

9T9* 

I    «tt 

7^ 

1898 

2    0 

i°A 

i  i  IT* 

2f 

1899 

2    0& 

n! 

i  "If 

3*1 

1900 

2    2& 

n! 

2       0* 

9T5s 

I9'oi 

2    If 

9* 

i  "ft 

i4f 

1891-1901 

3  6| 

i     9i 

2     3t 

39! 

These  figures  show  a  great  instability  of  exchange,  ex- 
cept for  a  few  years  (notably  1898  and  1899). 


Sterling  Obligations 

The  Straits  Settlements  were  not,  like  India,  practically 
forced  to  the  establishment  of  a  fixed  par  of  exchange  by 
the  existence  of  a  large  public  debt  payable  in  gold.2  The 
Straits  Government  itself  had  no  public  debt,  while  the 
small  debt  of  the  Federated  Malay  States  was  a  local  in- 
terstate debt,  payable  in  the  local  silver  currency.  Both 
governments,  however,  regularly  had  large  sterling  obli- 
gations to  meet  in  the  purchase  of  supplies,  while  the 

1  Cf.  Min.  Evid.  App.,  S,  S,  Cur.  Com.  Rep.,  p.  143. 

2  Cf .  supra,  pp.  14-17. 


CURRENCY  PRIOR  TO  REFORM  OF   1903 


399 


salaries  of  all  the  higher  officials  of  the  Straits  Government 
were  on  a  sterling  basis.1  Inasmuch  as  these  charges  re- 
mained relatively  fixed  regardless  of  the  fluctuations  in 
the  gold  value  of  the  local  dollar,  while  the  gold  value  of 
the  revenue  received  tended  to  fall  rapidly  with  the  fall  of 
exchange,  the  Government  found  itself  handicapped  in 
meeting  its  obligations. 


Foreign  Trade 

The  relative  importance  of  the  Straits  Settlements  trade 
with  gold  and  silver  standard  countries,  respectively,  dur- 
ing the  period  from  1891  to  1901,  may  be  seen  from  the 
following  figures  representing  imports  and  exports  of  mer- 
chandise inclusive  of  intersettlement  trade  and  exclusive  of 
treasure.2 

TRADE  WITH  SILVER  STANDARD  COUNTRIES 
(British  dollars,  thousands) 


YEAR 

EXPORTS 

IMPORTS 

TOTAL 
EXPORTS  AND 
IMPORTS 

1891 

45,579 

83,937 

129,516 

1892 

48,140 

93,946 

142,086 

1893 

44,992 

83,891 

128,883 

1894 

53,771 

94,068 

147,839 

i89S 

55,434 

96,877 

I52,3H 

1896 

57P79 

96,260 

153,339 

1897 

57,299 

98,769 

156,068 

1898 

64,747 

98,615 

163,362 

1899 

68,710 

121,945 

190,655 

1900 

76,294 

i35>402 

211.696 

1901 

79,965 

142,033 

221,998 

1  See  Colonial  Office  List,  1903,  pp.  309-11 ;  and  Huttenbach,  The  Silver 
Standard  and  the  Straits  Currency  Question,  pp.  9  and  10. 

2  Min.  Evid.  App.,  S.  S.  Com.  Rep.,  pp.  130  and  131. 


400    THE  STRAITS   SETTLEMENTS   CURRENCY  REFORM 

TRADE  WITH  GOLD  STANDARD  COUNTRIES 
(British  dollars,  thousands) 


YEAR 

EXPORTS 

IMPORTS 

TOTAL 
EXPORTS  AND 
IMPORTS 

1891 

68,910 

44,895 

113,805 

1892 

74,693 

43,436 

118,129 

i893 

89,538 

68,547 

157,085 

1894 

104,971 

88,613 

193,862 

1895 

105,394 

88,468 

193,862 

1896 

104,698 

89,936 

203,634 

1897 

114,878 

99,59J 

214,469 

1898 

129,394 

124,387 

253,78i 

1899 

157,145 

133,346 

290,491 

1900 

174,621 

154,994 

329,6i5 

1901 

176,808 

150,776 

327,584 

While  the  figures  show  a  healthy  growth  of  trade  in 
general,  it  is  noteworthy  that  the  greater  proportion  of  the 
foreign  trade  at  the  close  of  the  period  was  with  gold 
standard  countries,  that  the  trade  with  those  countries 
was  a  rapidly  growing  one,  that  its  growth  was  more  than 
commensurate  with  that  with  the  silver  standard  countries, 
and  that  despite  the  severe  handicap  given  to  the  import 
trade  with  gold  standard  countries  by  a  falling  exchange,  the 
reported  imports  from  those  countries  had  been  for  some 
time  larger  than  those  from  silver  standard  countries,  while 
the  growth  of  the  former  had  been  much  the  more  rapid. 
As  would  have  been  expected,  the  exports  to  silver  standard 
countries  lagged  far  behind  those  to  gold  standard  countries. 

While  it  is  doubtless  true  that  most  of  the  trade  with  gold 
standard  countries  appeared  in  the  colony's  trade  statistics, 
and  that  a  considerable  part  of  what  Mr.  August  Hutten- 
bach  called  the  "Hinterland  trade"  with  silver  countries 
did  not  appear,  and  while  Mr.  Huttenbach  may  have  been 
correct  in  maintaining  that  dollar  for  dollar  the  trade  with 
the  silver  standard  countries  was  somewhat  more  impor- 


CURRENCY  PRIOR  TO  REFORM  OF  1903     401 

tant  to  the  colony  than  that  with  the  gold  standard  coun- 
tries, it  was  none  the  less  true  that  the  Straits'  foreign 
trade  both  actually  and  prospectively  should  logically  have 
placed  it  among  the  gold  standard  countries  long  before 
1903. 

Other  Disadvantages  of  Silver  Standard 

Another  serious  disadvantage  of  the  existing  silver  stand- 
ard, the  Committee  believed,  was  the  discouragement  to 
the  investment  of  foreign  capital  in  the  Colony,  due  to  the 
apparent,  and  in  many  cases  real,  decline  in  the  sterling 
value  of  capital  invested  in  the  Colony.  These  facts, 
together  with  the  element  of  uncertainty  and  speculation 
which  was  brought  into  business  by  a  fluctuating  exchange, 
the  feeling  that  exchange  had  fallen  to  the  point  beyond 
which  a  further  fall  would  cease  to  be  profitable  to  the 
export  trade,  and  the  movement  on  the  part  of  neighboring 
countries  toward  the  gold  basis,  forced  the  Committee  to 
the  conclusion  that  the  time  was  ripe  for  placing  the  Straits 
Settlements,  the  Federated  Malay  States,  and  Johore  upon 
a  gold  standard. 

Various  Plans  for  Introducing  the  Gold  Standard 

Three  principal  methods  of  making  the  change  to  the 
gold  standard  were  considered.  The  plan  suggested  by 
the  Singapore  Chamber  of  Commerce  in  1897  was  believed 
to  be  impracticable  for  the  reasons  already  stated.1  The 
introduction  of  the  Indian  currency  system,  which  was 
recommended  by  five  members  of  the  local  currency  com- 
mittee in  1893,  involving  as  it  did  a  change  in  the  unit  of 
value  from  the  dollar  to  the  rupee,  the  adoption  of  a  cur- 
rency which  would  be  controlled  largely  by  another  coun- 
try, and  whose  bullion  value  was  far  below  its  face  value, 
found  comparatively  few  supporters  in  1903,  whatever 
may  have  been  the  merits  of  the  plan  ten  years  before. 
1  Supra,  pp.  395-96. 

2D 


CHAPTER  II 
A  CURRENCY  REFORM  PLAN  ADOPTED 

THE  plan  finally  recommended  by  a  unanimous  vote  of 
the  Straits  Settlements  Currency  Committee  may  best  be 
described  in  the  Committee's  own  words : 

"  A  special  Straits  dollar  of  the  same  weight  and  fineness  as 
the  British  dollar  at  present  current  in  the  East  [gradually 
to  be  substituted]  for  the  Mexican  and  British  dollars,  the 
latter  dollars  ...  [to  be]  demonetized  as  soon  as  the  sup- 
ply of  the  new  dollars  is  sufficient  to  permit  of  this  being 
done  with  safety.  Under  this  plan  it  will  be  necessary  for 
the  Straits  to  obtain  a  considerable  supply  of  the  new 
dollars,  and  as  soon  as  this  is  received,  the  new  dollars 
'should  be  made  full  legal  tender  concurrently  with  the 
Mexican  and  British  dollars,  and  steps  should  be  taken  to 
put  them  into  circulation.  The  first  supply  of  new  dollars 
might  be  obtained  ...  by  remitting  to  one  of  the  Indian 
mints  a  portion  of  the  coin  reserve  of  the  currency  commis- 
sioners to  be  melted  down  and  converted  into  the  new  Straits 
dollars,  and  this  process  might  be  continued  until  practically 

the  whole  of  the  coin  reserve  is  converted  into  new  dollars 

"  Simultaneously  with  the  arrival  of  the  first  supply  of 
the  new  dollars  and  with  the  making  of  them  legal  tender, 
the  import  of  Mexican  and  British  dollars  should  be 
temporarily  prohibited  and  the  export  of  the  new  dollars 
should  also  be  prohibited.  As  there  is  ordinarily  a  large 
import  of  Mexican  and  British  dollars  into  the  Straits, 
and  subsequent  export  of  them,  we  think  it  likely  that 
when  their  import  is  prohibited  there  would  be  a  tendency 
toward  a  considerable  drain  of  these  coins  from  the  Straits 
Settlements,  and  if  the  new  dollars  are  freely  supplied,  the 

402 


A  CURRENCY  REFORM  PLAN  ADOPTED      403 

change  of  currency  might  be  completed  without  any  great 
delay. 

"  When  the  currency  is  so  largely  composed  of  the  new 
dollars  as  to  justify  the  measure,  the  Mexican  and  British 
dollars  should  be  finally  demonetized  and  the  Straits 
Settlements  would  then  be  in  the  position  in  which  India 
was  when  the  change  of  standard  was  undertaken  in  that 
country,  with,  however,  the  very  important  advantage  that 
there  would  not  be  an  enormous  proportion  of  the  new 
coins  either  hoarded  or  circulating  in  foreign  countries, 
which  might,  by  being  thrown  into  circulation,  indefinitely 
delay  the  establishment  of  the  gold  standard. 

"  After  the  Straits  Settlements  had  arrived  at  this  stage, 
the  procedure  might  be  exactly  the  same  as  it  was  in  the 
case  of  India,  i.e.,  after  sufficient  Straits  dollars  had  been 
coined  to  meet  the  requirements  of  business  in  the  Colony 
and  the  adjoining  States,  the  coinage  of  dollars  would  cease 
until  the  exchange  value  of  the  dollar  had  reached  whatever 
value  in  relation  to  the  sovereign  might  be  decided  on  by 
the  Government  as  the  future  value  of  the  Straits  dollar. 
After  this  stage  is  reached  the  Straits  Government  would 
issue  the  new  dollars  in  exchange  for  gold,  and  at  the  fixed 
rate. 

"  When  the  gold  standard  is  established,  it  would  not  be 
indispensable  that  any  gold  coins  should  be  made  legal 
tender  in  the  Colony  and  the  States.  But  the  Government 
should  be  prepared  not  only  to  give  in  exchange  for  a  sover- 
eign such  a  number  of  dollars  as  are  hereafter  declared 
equivalent  to  a  sovereign,  but  also  to  give  sovereigns  in 
exchange  for  dollars  at  the  same  rate  so  long  as  gold  is 
available,  or  to  give  bills  on  the  Crown  agents  in  London 
based  on  the  fixed  rate  of  exchange." 1 

The  Committee  expressed  the  opinion  that  it  was  "de- 
sirable that  the  standard  of  value  and  the  currency  of  the 
Straits  Settlements  and  the  Federated  Malay  States  should 
continue  to  be  identical,  and  they  hold  the  same  opinion 
with  regard  to  Johore." 

1  S.  S.  Cur.  Com.  Rep.,  pp.  12  and  13. 


404    THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 

The  above  recommendations  of  the  Currency  Committee 
were  first  published  in  Singapore  on  May  7,  1903  and  were 
adopted  in  toto  by  the  legislative  council  on  May  29. 
They  accordingly  represent  the  law  under  which  the  new 
currency  was  established. 

Heavy  Shipments  of  Mexican  and  British  Dollars  to  the 

Straits 

On  September  25,  1903  an  ordinance  was  passed  author- 
izing the  Governor  in  Council,  subject  to  the  approval  of 
the  Secretary  of  State,  to  issue  an  order  prohibiting  the 
importing,  circulating,  or  holding  in  one's  possession  of  cer- 
tain coins  to  be  specified  in  the  order,  after  a  date  fixed 
therein,  under  penalty  of  heavy  fines  and  the  forfeiture  of 
the  coins  thus  illegally  used  or  held. 

As  soon  as  it  became  evident  that  the  importation  of 
Mexican  and  British  dollars  into  the  Straits  Settlements 
was  likely  to  be  prohibited  when  the  new  Straits  dollars 
for  which  they  were  to  be  exchanged  began  to  arrive, 
sterling  exchange  rose  in  the  Straits  as  compared  with 
neighboring  countries,  and  a  strong  tide  of  Mexican  and 
British  dollars  began  to  flow  from  Hongkong,  the  Philip- 
pines, China,  French  Indo  China,  and  other  neighboring 
countries  toward  Singapore.  The  market  was  so  flooded 
with  this  money  that  considerable  currency  exportations 
were  soon  found  profitable. 

New  Dollars  Placed  in  Circulation 

The  new  dollars  which  were  coined  at  the  Bombay  mint 
began  to  arrive  early  in  October  1903.  Nearly  every  boat 
coming  to  Singapore  from  Colombo  after  the  first  of  October 
is  said  to  have  brought  several  hundred  thousand  of  them. 
They  were  placed  in  circulation  through  the  instrumentality 
of  the  treasury  and  the  banks. 

The  authorities  immediately  took  steps  to  effect  the  sub- 


A  CURRENCY  REFORM  PLAN  ADOPTED      405 

stitution  of  the  new  coins  for  the  British  and  Mexican  dol- 
lars. On  October  2,  1903  there  were  issued  under  au- 
thority of  the  "coin  import  and  export  ordinance,  1903," 
two  orders  in  council,1  the  one  prohibiting  the  importation 
of  British  and  Mexican  dollars  into  the  Colony  2  from  the 
third  day  of  October  1903^  the  other  prohibiting  the  ex- 
portation from  the  Colony  of  the  new  Straits  Settlements 
dollars  from  the  same  date.4  As  a  result  of  the  monetary 
isolation  of  the  Straits  Settlements  arising  from  these  or- 
ders, merchants  experienced  for  some  tune  considerable 
difficulty  in  settling  trade  balances  with  other  countries.5 

Old  Dollars  Demonetized 

By  the  end  of  the  summer  of  1904  the  bulk  of  the  old 
currency  had  been  withdrawn  from  circulation,  and  on 

1  Cf .  Report  on  Stability  of  International  Exchange,  1903,  p.  294. 

2  The  Federated  Malay  States  and  Johore  were  excluded  from  the  ap- 
plication of  these  orders.     Ibid. 

8  At  a  later  date,  when  a  considerable  part  of  the  old  currency  was  being 
tied  up  in  the  process  of  recoinage,  and  there  was  in  consequence  a  scarcity 
of  currency  to  meet  trade  demands,  the  Government  authorized  the  banks 
to  import  certain  amounts  of  British  and  Mexican  dollars  for  temporary  use, 
on  condition  that  they  should  be  reexported  as  soon  as  the  scarcity  of  money 
arising  from  the  recoinage  should  be  over.  In  September  1904  the  Governor 
in  Council,  in  response  to  an  urgent  petition  of  the  Singapore  Chamber  of 
Commerce,  issued  an  order  exempting,  until  the  Chinese  New  Year,  British 
North  Borneo,  Labuan,  and  Sarawak  from  the  operation  of  the  order  pro- 
hibiting the  importation  of  British  and  Mexican  dollars  into  the  Straits 
Settlements. 

4  This  latter  order  was  evaded  to  a  considerable  extent.  It  is  said  that 
several  hundred  thousand  of  the  new  dollars  for  some  time  passed  back  and 
forth  between  the  Straits  Settlements  and  China.  The  order  was  suspended 
for  a  time,  but  was  again  put  into  operation  on  February  13,  1906.  At  one 
time  about  two  million  of  the  new  dollars  were  exported  to  Hongkong, 
where  they  brought  a  premium  of  between  three  and  four  per  cent ;  and  at 
another  time,  when  it  was  feared  that  an  excessive  number  of  the  new 
dollars  had  been  coined,  the  Governor  permitted  the  exportation  of  some 
five  hundred  thousand  dollars  to  Hongkong  on  condition  that  they  be 
chopped  so  that  they  could  not  be  returned.  Cf.  supra,  p.  351. 

6  Cf.  Report  of  the  Singapore  Chamber  of  Commerce  for  the  Year  1904, 
pp.  5,  101-105. 


406    THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 

August  31  the  Governor,  acting  in  accord  with  powers 
granted  him  under  an  order  in  council  of  June  25,  1903,* 
issued  a  proclamation  removing  the  legal  tender  quality 
from  British  and  Mexican  dollars  and  providing  that  they 
should  thenceforward  not  be  receivable  in  payment  of 
government  dues.  On  that  date  the  old  dollars  ceased  to 
be  exchangeable  for  the  new  at  government  offices. 

"  Thus,  [said  the  chairman  of  the  Singapore  Chamber  of 
Commerce,  in  his  address  before  that  body  on  September  22, 
1904,]  the  second  important  step  has  been  smoothly  and 
successfully  effected,  and  there  is  cause  for  congratulation 
that  the  ground  has  been  cleared  for  the  succeeding  stages 
of  the  currency  scheme.  The  careful  guidance  of  the  scheme 
so  far  by  the  Government,  notwithstanding  its  characteristic 
difficulties,  must  meet  with  cordial  appreciation  on  the 
part  of  the  mercantile  community." 2 

The  work  of  withdrawing  the  old  coins  and  of  recoining 
them  was  greatly  facilitated  by  the  fact  that  the  Govern- 
ment possessed  in  its  currency  note  reserve  a  large  supply 
of  the  old  dollars,  which  it  was  able  to  commence  shipping 
immediately  to  the  Bombay  mint  for  recoinage,  and  by  the 
further  fact  that  it  was  able  to  use  this  reserve  as  a  sort  of 
continuing  fund  during  the  entire  process  of  the  recoinage.3 
Other  circumstances  of  importance  which  assisted  the  Gov- 
ernment in  expediting  the  recoinage  were  the  facts  that 
the  recoinage  was  effected  at  the  comparatively  near-by 

1  This  order  will  be  found  printed  on  pp.  291  and  292  in  the  Report  on 
the  Stability  of  International  Exchange,  submitted  by  the  Commission  on 
International  Exchange  to  the  Secretary  of  War,  October  i,  1903.     Cf. 
also  article  on  "Money,  Weights,  and  Measures"  in  the  Singapore  and 
Straits  Settlements  Directory,  1899,  App.,  pp.  19-21. 

2  Ibid.,  p.  5. 

3  The  Government's  note  guarantee  fund  consisted  in  part  of  coin  and  in 
part  of  securities.      The  average   circulation  of    government  notes  for 
January  1904,  which  was  a  typical  month,  was    $16,503,167,  and  of  this 
amount  $10,231,006  was  secured  by  coin.     Cf.  Report  of  the  Commissioners 
of  Currency  for  the  Straits  Settlements  for  January  1904. 


A  CURRENCY  REFORM  PLAN  ADOPTED      407 

city  of  Bombay,  and  that,  as  the  result  of  the  heavy 
influx  of  the  old  dollars  in  the  summer  of  1903,  the  local 
banks  were  oversupplied  with  these  coins  and  shipped 
them  in  large  amounts  to  Bombay  for  recoinage  on  the 
account  of  the  Government  without  interest  charge. 

Recoinage  Completed 

The  recoinage  was  completed  about  November  1904. 
The  total  number  of  British  and  Mexican  dollars  sent  to 
the  mint  to  be  converted  was  35,372,541,  and  the  total 
number  of  Straits  dollars  minted  therefrom  was  35,4oo,576.1 
The  result  of  the  recoinage  was  therefore  a  gross  profit  of 
28,035  dollars,  which  must  be  deducted  from  the  total  ex- 
pense of  reminting,  amounting  to  788,180  dollars,  thus 
leaving  a  net  expense  of  760,145  dollars.2  By  the  end  of 
November  1904  the  new  dollars  had  been  almost  com- 
pletely substituted  for  the  old  in  the  Colony's  circulation,3 
and  the  Government  was  confronted  with  the  task  of 
raising  the  dollar  to  "whatever  value  in  relation  to  the 
sovereign  might  be  decided  on"  as  the  permanent  gold  par. 

1  There  was  in  addition  a  withdrawal  from  circulation  of  about  $250,000 
in  redundant  small  change,  which  was  recoined  into  5o-cent  pieces. 

2  Economist,  LXIII,  Part  II,  p.  1672. 

8  Report  of  the  Singapore  Chamber  of  Commerce,  1904,  pp.  4-5. 


CHAPTER  III 

RAISING  THE  DOLLAR  TO  TWENTY-EIGHT  PENCE 

THE  course  of  appreciation  is  shown  in  the   following 
chart  and  in  Appendix  A.1 


PENCE 

88 

«? 

£6 
85 
24 
US 


STRAITS  SETTLEMENTS. 

CURRENCY  REFORMS  OF 

1903-1908 


It  will  be  seen  that  Singapore  rates  fluctuated  closely 
in  harmony  with  the  price  of  silver  and  with  Hongkong 
exchange  2  down  to  about  March  igo4,3  and  that  from  that 

1  Pages  460-61 . 

2  Cf.  supra,  pp.  351-52- 

3  The  rise  of  Singapore  exchange  above  Hongkong  exchange  and  above  the 
bullion  value  of  the  dollar  between  July  and  October  1903  was  due  to  the 

408 


RAISING  THE  DOLLAR  TO  TWENTY-EIGHT  PENCE    409 

time  forward  until  the  fall  of  1904  they  fluctuated  with 
those  rates,  although  at  a  considerably  higher  level.  From 
December  1904  to  February  1905  the  average  bullion 
value  l  of  the  Straits  dollar  was  actually  higher  than  the 
average  sterling  telegraphic  transfer  rate  in  Singapore. 
The  decline  in  the  price  of  silver  in  March  and  April  1905 
was  not  accompanied  by  an  appreciable  decline  in  Singapore 
exchange,  and  from  that  time  forward  the  divorce  of  the 
Straits  dollar  from  the  silver  standard  may  be  considered 
to  have  been  effective. 

On  January  29,  1906  the  Governor  in  Council  issued  an 
ordinance  supplemented  by  an  executive  order  declaring 
the  sterling  value  of  the  new  dollar  to  be  two  shillings 
and  four  pence.2  Soon  after  this  action  had  been  taken 
telegraphic  rates  settled  down  on  a  level  of  2&%d.,  and 
continued  on  or  about  that  level  during  the  next  five 
or  six  months.  About  that  tune  sovereigns  were  being 
imported  in  considerable  quantities  by  the  banks,  and  the 
result  was  a  fall  in  sterling  telegraphic  transfer  rates  to 
27rfd.  With  the  opening  of  the  year  1907  the  rate  again 
rose  above  2&d. 

Before  discussing  the  reasons  which  led  to  the  adoption 
of  a  two  shilling  and  four  pence  dollar,  and  the  effect  of  its 
adoption  upon  the  trade  of  the  Straits  Settlements,  it  will 
be  well  to  consider  briefly  the  conditions  existing  in  the 
Straits  Settlements  during  the  period  while  the  dollar  was 
being  raised. 

anticipated  redemption  of  British  and  Mexican  dollars  by  the  Government 
at  par  in  the  new  dollar,  and,  as  pointed  out  previously  (supra,  p.  404), 
was  the  reason  for  the  heavy  influx  of  British  and  Mexican  dollars  into  the 
Straits  Settlements  at  that  time.  The  supply  finally  became  so  excessive 
that  exchange  was  forced  down  below  bullion  point  between  October  1903 
and  January  1904,  and  the  dollars  were  reexported  in  considerable  quantities. 

1  By  "bullion  value"  is  meant  the  value  of  the  fine  silver  content  of  the 
dollar  in  London,  according  to  the  London  price  of  standard  silver  for 
prompt  delivery. 

2  For  the  procedure  followed  in  "fixing"  the  value  of  the  dollar,  see  infra, 
pp.  416-17. 


410    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

A  Period  of  Excessive  Speculation  in  Exchange 

The  depressing  influence  upon  trade  of  an  appreciating 
unit  of  value  is  too  familiar  to  require  discussion.  Mr. 
Balfour  did  not  greatly  overstate  the  situation  when  he 
declared  that  a  slow  appreciation  of  the  standard  of  value 
"is  probably  the  most  deadening  and  benumbing  influence 
which  can  touch  the  springs  of  enterprise  in  a  nation."  x 
The  history  of  Europe  during  the  dark  ages  and  the  history 
of  Europe  and  America  during  the  period  1873-97  are 
stock  examples  of  this  influence.  The  appreciation  of  the 
Straits  dollar  differs  in  many  respects  from  the  ordinary 
example  of  an  appreciating  currency.  In  this  case  the 
appreciating  unit  circulated  in  a  country  very  limited  in 
area,  whose  trade  was  preeminently  foreign  rather  than 
domestic.  The  rate  of  appreciation  was  very  rapid 2 
and,  unlike  those  cases  of  appreciation  resulting  from 
a  rise  in  the  value  of  the  material  from  which  the 
money  unit  is  coined,  was  clearly  perceptible  to  the 
public.3 

It  is  an  undisputed  fact  that  the  period  of  appreciation 

—  the  period  from  the  summer  of  1904  to  January  29, 
1906,  when  the  sterling  par  of   the  dollar  was  declared 

—  was  one  of  speculative  activity,  and  that  in  the  lat- 
ter part  of  this  period,  that  is,  after  August  1905,  the 
speculation  was  so  widespread  and  so  intense  as  to  in- 
terfere seriously  with  nearly  all  legitimate  business  en- 
terprise. 

1  Quoted  by  Francis  A.  Walker,  The  Relation  of  Changes  in  the  Volume 
of  the  Currency  to  Prosperity,  in  Discussions  in  Economics  and  Statistics, 
H,  p.  235. 

2  Cf.  chart  p.  408. 

3  The  appreciation  of  the  rupee  in  India  is  hardly  a  parallel  case.    The 
gold  par  to  be  adopted  was  known  in  advance,  while  the  amount  of  the  ap- 
preciation above  the  minimum  gold  value  possessed  by  the  rupee  prior  to 
the  announcement  of  the  Herschell  Committee's  scheme  in  1893  was  very 
small.     Cf.  supra,  pp.  32—33  and  50. 


RAISING  THE  DOLLAR  TO  TWENTY-EIGHT  PENCE      411 

In  order  to  make  clear  the  character  of  this  speculation, 
a  word  of  explanation  concerning  the  banking  business  in 
the  Straits  Settlements  is  desirable.  The  banking  business 
in  the  Straits  Settlements,  as  well  as  in  the  Philippines,1 
Hongkong,  Shanghai,  and  most  of  the  other  port  cities  of 
the  Orient,  is  largely  confined  to  foreign  exchange  oper- 
ations. By  contracting  in  advance  for  the  purchase  or 
sale  of  exchange  at  a  definite  rate,  merchants  were  ac- 
customed to  insure  themselves  against  losses  from  fluctu- 
ations in  silver  during  the  interim  between  purchase  and 
sale  of  merchandise,  while  the  banks  in  turn  protected 
themselves  by  covering  their  forward  purchases  of  local  bills 
by  contracts  for  the  forward  sales  of  bank  paper  and  tele- 
graphic transfers,  and  vice  versa.  An  exporter,  for  ex- 
ample, knowing  in  January  that  in  the  course  of  a  few 
months  he  would  have  a  cargo  of  produce  to  ship  to  the 
London  market,  went  to  his  banker  and  made  a  contract 
to  deliver  sometime  in  the  course  of  the  next  three,  four,  or 
six  months,  as  the  case  might  be,  sterling  bills  covering  the 
value  of  his  anticipated  shipment,  at  a  rate  of  exchange 
agreed  upon.  In  the  Straits  Settlements  the  exporter  usu- 
ally had  an  option  of  at  least  two  months,  i.e.,  a  right 
to  deliver  his  bills  at  any  time  within  two  months,  and 
frequently  he  had  an  option  of  five  or  six  months.  After 
the  fixing  of  his  exchange  the  exporter  often  obtained  ad- 
vances from  the  bank,  usually  in  the  form  of  an  overdraft, 
secured  by  the  pledge  of  the  produce  to  be  exported.  In 
the  same  manner  importers  made  contracts  months  in 
advance,  fixing  rates  of  exchange  for  the  purchase  of  bank 
paper  or  telegraphic  transfers  with  which  to  make  remit- 
tances for  anticipated  importations. 

It  has  been  pointed  out  that,  although  the  sterling  rate 
at  which  the  Straits  dollar  would  be  fixed  was  not  declared 
in  advance,  as  had  been  the  sterling  rate  in  India,  in  the 

1  A  more  detailed  account  of  the  method  is  given  in  the  discussion  of  the 
Philippine  currency  reform,  supra,  pp.  292-98. 


412     THE  STRAITS   SETTLEMENTS   CURRENCY   REFORM 

case  of  the  rupee  in  1893,  it  was  generally  believed  that  a 
rate  of  two  shillings  would  be  adopted.  This  appears  to 
have  continued  to  be  the  popular  belief  at  least  as  late  as 
the  latter  part  of  the  year  1904,  when  the  sudden  advance 
in  the  price  of  silver  made  it  evident  that  a  two-shilling  dol- 
lar containing  416  grains  of  silver  .900  fine  would  be  in  great 
danger  of  the  melting  pot.  Here  then  was  a  situation  which 
appeared  to  the  merchant  who  was  inclined  to  speculate  as 
"a  sure  thing."  The  value  of  the  dollar,  he  reasoned,  was 
bound  to  rise,  and  its  gold  par  was  certain  to  be  fixed  in 
the  probably  not  distant  future  at  a  sterling  value  ma- 
terially higher  than  the  one  it  then  had,  and  at  least  several 
per  cent  higher  than  its  bullion  value,  whatever  might  be 
the  price  of  silver.  A  merchant  contracting  in  August  for 
the  delivery  of  sterling  bills  in  November  or  December 
would  have  the  benefit  of  whatever  appreciation  might  take 
place  in  the  dollar  in  the  interim,  and,  in  case  his  bills  should 
not  be  ready  for  delivery  at  that  time,  he  could  presumably 
cover  at  a  profit  by  the  purchase  of  bank  paper  or  telegraphic 
transfers. 

As  a  result  of  this  situation  all  classes  of  people  began  to 
speculate  for  a  rise  in  exchange.  Sterling  bills  1  were  of- 
fered to  the  banks  in  large  quantities  in  the  summer  of  1905 
for  forward  delivery.  Nearly  every  merchant  who  had  the 
remotest  prospect  of  having  any  bills  against  possible  ex- 
ports during  the  next  six  months  or  so  rushed  into  the  mar- 
ket to  fix  his  exchange.  Many  sales  are  said  to  have  been 
made  simply  on  a  margin  without  reference  to  anticipated 
exportations.  Little  attempt  was  made  to  cover.  Ster- 
ling rates  naturally  rose  rapidly  as  a  result  of  this  demand 
for  dollars,  and  it  soon  developed  that  a  certain  foreign 
bank  was  underbidding  all  the  other  banks  by  about  one 
sixteenth  of  a  penny,  and  was  in  consequence  doing  the 

1  There  was  also  considerable  speculation  on  the  Indian  exchanges,  par- 
ticularly by  Indian  merchants  and  the  so-called  "chitties"  or  Indian  money 
lenders. 


RAISING  THE  DOLLAR  TO  TWENTY-EIGHT  PENCE    413 

lion's  share  of  the  business.  This  bank,  with  a  branch  in 
Singapore  and  a  sub-branch  at  Penang,  seemed  to  have 
under  its  control  a  large  part  of  the  available  supply  of 
dollars.  Soon,  however,  there  began  to  be  misgivings  as 
to  whether  exchange  had  not  gone  unreasonably  high; 
all  sorts  of  rumors  were  afloat ;  and  it  was  not  long  before 
there  was  a  sudden  break  in  the  rates,  everybody  wanted 
cover,  there  was  a  clamor  for  bank  paper  and  local  bills, 
and  down  exchange  came  as  rapidly  as  it  had  previously  ad- 
vanced. Here  likewise  the  one  bank  that  had  done  the 
bulk  of  the  business  when  exchange  was  rising  overbid  its 
competitors  when  exchange  was  falling,  and  continued 
largely  to  control  the  market.  The  manager  of  this  bank 
said  to  the  writer  that  his  plan  of  operations  involved  prac- 
tically no  risk.  He  knew,  he  said,  that  the  dollar  would 
not  be  fixed  at  a  lower  rate  than  two  shillings,  and,  when 
silver  rose,  that  it  would  be  fixed  at  a  considerably  higher 
rate,  for  the  Government  would  certainly  not  fix  the  dollar 
at  a  lower  value  than  five  or  six  per  cent  above  bullion 
point.  These  facts  he  appreciated  very  early,  and  he  was 
the  first  to  follow  them  to  their  logical  conclusion.  At  first 
for  a  short  time  he  overbought  sterling,  anticipating  a  fall 
in  the  price  of  silver.  He  began  to  oversell  as  early  as  the 
fore  part  of  1904,  and  early  in  the  spring  of  that  year  his 
over-sales  amounted  to  a  very  large  figure.  He  kept  his 
heavy  figures  on  this  side  of  the  ledger  until  he  gained  a 
virtual  control  of  the  market  in  the  summer  of  1905, 
and  this  control  he  practically  maintained  until  January 
1906. 

There  were  at  least  seven  such  cycles  of  exchange  fluctu- 
ations of  greater  or  less  duration  between  August  i,  1905 
and  February  i,  1906.  Throughout  the  month  of  January 
1906  the  money  market  was  in  a  condition  of  panic,  and 
toward  the  latter  part  of  the  month,  about  the  time  of  the 
Chinese  New  Year,  i.e.,  the  25th  and  26th,  the  panic  was 
feverish  and  intense.  There  was  at  this  time  the  usual 


414    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

heavy  demand  for  money  to  meet  the  Chinese  New  Year's 
liquidations,1  in  addition  to  the  demand  to  meet  the  many 
exchange  contracts  which  were  then  coming  due.  The 
bank  which  during  the  previous  six  months  had  largely 
controlled  the  exchange  market,  which  had  to  some  ex- 
tent dictated  terms  to  the  other  banks,  and  upon  which 
speculators  had  generally  relied,  found  temporary  difficulty 
itself  in  making  collections  and  in  meeting  its  obligations, 
and  was  forced  to  beg  assistance  from  the  other  banks  in 
order  to  take  up  its  contracts.  The  assistance  was  finally 
given,  but  only  on  onerous  terms.  A  number  of  the  strong- 
est local  houses  were  threatened  with  bankruptcy,  and  it  was 
evident  that  a  supply  of  dollars  must  be  forthcoming  from 
somewhere  or  there  would  be  a  general  collapse. 

Exchange  rates  fluctuated  so  rapidly  during  this  period 
—  there  were  sometimes  five  or  six  quotations  a  day  — 
such  varying  rates  were  quoted  by  the  different  banks,  and 
business  was  done  so  extensively  on  rates  different  from 
those  publicly  quoted,  that  it  is  impossible  to  give  any  ade- 
quate idea  of  exchange  fluctuations  for  the  month.  The 
following  figures,  however,  will  give  a  suggestion  of  the 
frenzied  state  of  the  market.  On  January  3  sterling  tele- 
graphic transfers  were  quoted  in  Singapore  at  25.  2fd.,  on 
January  5  at  25.  3r^->  a  difference  of  over  2j  per  cent; 
on  January  10  the  rates  cabled  to  Manila  by  one  bank 
varied  from  25.  ^^d.  to  2S.  ^d.,  a  difference  of  1.8  per 
cent  during  the  day;  on  January  15  the  rate  opened  at  2S. 
4^/.  and  closed  at  25.  3-0^-,  a  difference  of  1.7  per  cent; 
on  January  18  the  rates  cabled  to  Manila  by  one  bank  varied 
from  25.  2}%d.  to  25.  4^.,  a  variation  of  nearly  4  per  cent 
during  the  day.2  These  examples,  the  writer  believes,  are 

1  All  debts  to  Chinamen  are  supposed  to  be  settled  by  the  time  of  Chinese 
New  Year. 

2  A  chart  showing  the  variations  in  the  opening  daily  rates  for  the  month 
of  January  is  given  in  The  Straits  Settlements  Financial  Reports  and  State- 
ments for  1906  (p.  8).    It  shows  that  the  extremes  of  the  month  were 


RAISING  THE  DOLLAR  TO  TWENTY-EIGHT  PENCE    415 

typical.  If  they  give  a  wrong  impression,  it  is  in  under- 
stating the  case  rather  than  in  exaggerating  it.  The 
manager  of  one  of  the  leading  Singapore  banks  informed 
the  writer  that  daily  exchange  fluctuations  in  Singapore 
during  January  sometimes  varied  by  as  much  as  five  per 
cent.  In  individual  cases,  of  course,  business  was  trans- 
acted at  all  sorts  of  extravagant  rates. 

The  excitement  became  so  intense  that  the  Government 
was  finally  forced  to  take  action  sooner  than  it  had  intended. 
In  the  latter  part  of  January,  when  the  Governor  returned 
to  Singapore  from  a  trip  to  Labuan,  he  made  a  statement 
before  the  council,  the  purport  of  which  is  said  to  have  been 
as  follows: 

"  He  had  been  surprised  to  learn  that,  during  his  absence 
from  the  Colony,  there  had  been  a  sharp  rise  in  exchange, 
and  his  opinion  was  that  this  was  very  largely  due  to  specu- 
lation upon  the  intention  of  the  Government  with  regard 
to  the  rate  which  would  ultimately  be  fixed  for  exchange 
between  silver  and  gold.  This  was  a  matter  which  no  one 
was  entitled  to  speculate  upon;  it  was  one  which  the  Govern- 
ment was  certainly  not  in  a  position  at  present  to  make  a 
statement  about.  As  every  one  was  aware,  the  course  of 
the  silver  market  had  been  so  peculiar  that  it  was  impossible 
for  the  Government  at  present  to  say  for  certain  what  the 
market  would  be  six  months  hence.  Six  months  ago  it 
was  2  6 d.  Today  it  was  over  30^.  Would  anybody  have  the 
boldness  to  say  that  six  months  hence  it  would  not  be  26d. 
again,  or  that  it  might  not  be  34^.?  Under  these  cir- 
cumstances, it  appeared  to  him  that  those  persons  who  were 
speculating  on  the  intentions  of  the  Government  were  in- 
dulging in  a  very  dangerous  operation,  in  which  they  might 
very  likely  burn  their  fingers.  He  could  only  say  that  it  was 
the  intention  of  the  Government  —  and  he  thought  this 

26$  on  January  2,  and  28^  on  January  12  —  a  difference  of  7.3  per  cent.  In 
six  days  the  rate  fell  5.9  per  cent,  i.e.,  from  28^  on  January  12  to  27  on 
January  18 ;  it  then  reacted  3.7  per  cent,  i.e.,  to  28  on  January  19. 


41 6    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

was  the  opinion  of  everybody  interested  in  the  trade  of  the 
place  —  to  fix  the  dollar  at  as  low  a  value  as  possible  con- 
sistent with  security.  That  was  all  he  was  in  a  position 
to  say  on  the  matter.  Whether  the  point  would  be  higher 
or  lower  than  the  existing  rates,  he  could  not  at  present 
state ;  the  facts  were  not  before  him  on  which  to  form  an 
opinion;  but  he  could  say  that  it  was  the  intention  and 
desire  of  the  Government  that  the  dollar  should  be  fixed  at 
as  low  a  value  as  possible  consistent  with  safety." 1 

In  the  latter  part  of  January  authority  was  sought  of  the 
Home  Government  to  fix  exchange  immediately.  There 
was  some  delay,  however,  in  obtaining  this  authority,  and 
when  it  was  finally  received,  about  January  26,  the  state  of 
the  exchange  market  was  such  that  it  was  considered  inex- 
pedient to  declare  the  rate  at  once.  On  Saturday  Janu- 
ary 27  the  Government  sought  to  steady  the  market 2  by 
asking  for  bids  for  the  cable  transfer  to  London  of  £100,000. 
None  of  the  bids  received  were  accepted,  but  the  hint  was 
said  to  have  had  the  desired  effect.3 


Rate  Fixed  at  Twenty-Eight  Pence 

On  January  29,  1906  the  Governor  in  Council  issued  an 
Ordinance  declaring  that 

"  it  shall  be  lawful  for  the  Commissioners  to  issue  notes  in 
exchange  for  gold  received  by  the  Commissioners  at  Singa- 
pore at  a  rate  of  exchange  to  be  notified  by  an  order  of  the 
Governor  in  Council  with  the  previous  approval  of  the  Secre- 

1  Statement  furnished  the  writer  by  a  local  manager  of  one  of  the  large 
Eastern  exchange  banks. 

2  This  procedure  led  to  considerable  unjust  criticism  of  the  Government 
on  the  ground  that,  knowing  in  advance  what  the  fixed  rate  would  be,  it  was 
endeavoring  to  beat  the  market  by  taking  advantage  of  the  higher  market 
rate  then  prevailing  before  declaring  its  fixed  rate.     No  criticism  could  have 
been  farther  from  the  truth. 

8  Straits  Settlements  Financial  Report  and  Statements,  1906,  p.  8. 


RAISING  THE  DOLLAR  TO  TWENTY-EIGHT  PENCE    417 

tary  of  State  and  the  Commissioners  may  invite  tenders  for 
the  issue  of  notes  in  Singapore  against  telegraphic  transfers 
in  favor  of  the  crown  agents  for  the  colonies  in  London 
and  may  at  their  discretion  accept  any  tender  which 
affords  sufficient  margin  above  the  rate  fixed  by  such 
order  in  council  to  cover  all  charges  including  interest 
which  may  be  incurred  in  remitting  to  Singapore  the 
equivalent  in  gold  at  the  fixed  rates  of  the  notes  issued 
for  such  tender.  .  .  . 

"  The  sum  so  received  in  gold  shall  form  part  of  the  note 
guarantee  fund  and  may  be  invested  by  the  Commissioners 
in  accordance  with  the  provisions  of  this  ordinance  or 
used  by  them  for  the  purchase  of  silver  to  be  minted  into 
Straits  Settlements  dollars.  .  .  .  Provided  that  the  whole 
of  the  profit  on  such  minting  shall  be  carried  to  a  separate 
gold  reserve  fund  and  not  form  part  of  the  note  guarantee 
fund."  * 

Pursuant  to  the  above  ordinance  the  Governor  in  Council 
issued  an  order  on  the  same  day,  declaring  "that  from  and 
after  the  date  of  this  order  the  Currency  Commissioners  may 
issue  notes  in  exchange  for  gold  received  by  them  at  Singa- 
pore at  the  rate  of  sixty  dollars  for  seven  pounds  sterling." 2 
Two  shillings  and  four  pence,  the  public  were  accordingly 
given  to  understand,  would  be  the  permanent  sterling  par 
of  the  dollar,  unless  future  advances  in  the  price  of  silver 
should  make  the  raising  of  the  dollar  to  a  higher  par  seem 
desirable.  The  Governor,  however,  refused  to  commit  him- 
self as  to  the  absolute  permanency  of  the  two  shilling  and 
four  pence  par. 

With  the  issuance  of  the  above  order  the  money  panic 
stopped,  for  it  was  thenceforth  possible  to  obtain  from  the 
Government  dollars  in  unlimited  quantities  by  the  presenta- 
tion of  sovereigns  in  London.  When  the  horizon  cleared, 

1  Ordinance  No.  i  of  1906,  entitled,  "An  Ordinance  further  to  amend 
'The  Currency  Note  Ordinance,  1899.'" 

2  Government  Gazette  Extraordinary,  XLI,  No.  5  (January  29,  1906), 
p.  290. 

2E 


41 8    THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 

it  was  found  that  several  of  the  principal  banks,  and 
one  in  particular,  had  large  supplies  of  dollars  in  their 
vaults. 

Between  July  1905  and  February  1906  the  gold  value 
of  about  fifty  million  dollars  (inclusive  of  government  notes 
and  of  subsidiary  and  minor  coins)  had  been  raised  from 
approximately  two  shillings  to  the  dollar  to  two  shillings 
and  four  pence,  an  appreciation  of  over  16  per  cent, 
representing  an  increment  to  the  gold  value  of  the  coun- 
try's currency  during  that  time  of  over  eight  hundred 
thousand  pounds  sterling.  This  advance  is  in  a  small  de- 
gree to  be  accounted  for  by  the  rise  in  the  price  of  silver ; 
and  the  increased  value  of  the  notes  was  dependent  slightly 
on  the  fact  that  the  Government  transferred  several  hun- 
dred thousand  dollars  from  the  general  treasury  funds  to 
the  note  guarantee  fund  to  help  make  good  the  decline  in 
the  dollar  value  of  the  sterling  securities  held  in  that  fund. 
The  Government  had  at  that  time  established  no  gold  re- 
serve fund,  however,  and  the  above  advance  is  to  be  ex- 
plained mostly  on  the  ground  of  a  relative  contraction  of 
the  currency  supply.  This  difference  between  the  bullion 
value  of  the  new  dollars  (at  which,  approximately,  they 
originally  circulated)  and  their  money  value  —  a  differ- 
ence which  under  other  methods  of  currency  reform  would 
have  accrued  to  the  public  treasury  as  seigniorage  profit 
and  would  have  furnished  a  substantial  part  of  a  gold  re- 
serve fund  —  found  its  way  largely  into  the  pockets  of  a 
few  speculators.  I  say  "a  few"  because  here,  as  in  most 
cases  of  the  sort,  the  great  majority  who  dabbled  in  the 
speculation  are  said  to  have  lost.  A  large  part  of  the 
profits  went  into  the  vaults  of  the  foreign  bank  mentioned 
above,  whose  local  manager  had  carefully  planned  the 
exploitation  of  the  currency  scheme  as  early  as  the  fall  of 
1903.  This  local  manager  apparently  had  for  the  ac- 
complishment of  his  purpose  a  large  part  of  his  bank's 
assets,  and  he  played  a  very  shrewd  and  successful  game, 


RAISING  THE  DOLLAR  TO  TWENTY-EIGHT  PENCE    419 

albeit  one  which  would  hardly  come  in  the  range  of  ordinary 
conservative  banking. 

The  Government's  action  in  offering  to  give  government 
currency  notes  for  sovereigns,  at  the  rate  of  two  shillings 
and  four  pence  to  the  dollar,  it  will  be  observed,  did  not 
necessarily  fix  the  gold  value  of  the  dollar,  but  merely 
marked  an  upper  limit  to  its  possible  appreciation  —  an 
upper  limit  like  that  established  by  the  Indian  Govern- 
ment in  June  1893  when  it  offered  to  give  rupees  for  sov- 
ereigns at  the  rate  of  16  pence.1  No  action  was  at  first 
taken  providing  for  the  giving  of  sovereigns  for  dollars, 
although  such  action  was  contemplated  as  soon  as  a  suf- 
ficient supply  of  gold  could  be  accumulated.2 


Principle  of  Gold-Exchange  Standard  Rejected 

The  provision  of  the  ordinance  of  January  29,  1906 
authorizing  the  "issue  of  notes  in  Singapore  against  tele- 
graphic transfers  in  favor  of  the  crown  agents  for  the 
colonies  in  London  "  was  meant  to  be  of  a  temporary  and 
emergency  character.  Under  ordinary  conditions  the  only 
method  of  obtaining  dollars  from  the  Government  was 
expected  to  be  through  the  presentation  of  the  actual 
sovereigns  in  Singapore.  The  Government  had  no  inten- 
tion (so  the  Governor  informed  the  writer  in  February  1906) 

1  Supra,  p.  35. 

8  With  reference  to  the  subject  of  the  redemption  of  notes  in  gold  the 
Governor  is  reported  to  have  said :  "If  the  Government  were  to  hold  out  to 
the  public  the  immediate  prospect  of  giving  gold  for  notes,  and  some  one 
came  along  with  notes  and  demanded  gold  and  Government  was  unable  to 
pay,  people  would  say :.  '  Here  you  are  holding  out  that  you  are  prepared  to 
give  gold  for  notes,  and  the  first  time  you  are  asked  to  do  so  you  fail  to  do 
it.'  They  [i.e..  Government]  must  first  of  all  get  something  of  a  gold  reserve 
before  they  could  hold  out  any  prospect  of  being  able  to  give  gold  in  exchange 
for  notes,  and  that  time  had  certainly  not  yet  arrived.  As  soon  as  they  had 
a  gold  reserve  they  would  be  prepared  to  consider  the  public  as  far  as  possible 
and  give  gold  for  notes  when  required."  Singapore  Free  Press,  January  30, 
1906. 


420    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

of  adopting  the  principle  of  the  gold-exchange  standard 
which  had  recently  been  adopted  in  the  Philippines  and  had 
been  legally  authorized  for  Mexico.1  It  was  said  that 
neither  the  home  authorities  nor  the  officials  in  Singapore 
were  in  favor  of  that  plan. 

The  objections  urged  in  various  quarters  in  Singapore 
to  the  adoption  of  the  gold-exchange  standard  were: 
(i)  That  it  would  unduly  interfere  with  the  business  of 
the  banks.  (2)  That  it  would  encourage  banks  to  work 
on  dangerously  low  cash  balances,  knowing  as  they  would 
that  they  could  obtain  dollars  of  the  Government  on  a 
moment's  notice  by  the  purchase  of  cable  transfers  on 
Singapore  from  the  crown  agents  for  the  colonies  in  Lon- 
don. (3)  That  there  would  be  danger  of  the  Government's 
notes  depreciating  unless  they  were  redeemable  in  gold  in 
the  country  itself.  (4)  That  the  monetary  circulation  of 
the  Straits  Settlements  was  too  small  to  make  the  plan  feas- 
ible there.  (5)  That  the  plan  would  require  a  larger  re- 
serve fund  than  would  otherwise  be  necessary,  because  the 
Government  would  be  compelled  to  keep  a  reserve  both 
in  London  and  in  Singapore;  and  that  in  each  place  the 
reserve  would  have  to  be  large,  because  drafts  on  the  fund 
through  the  sale  of  telegraphic  transfers  would  not  give  the 
Government  any  such  warning  in  advance  of  the  demands 
liable  to  be  made  as  would  enable  it  to  replenish  the 
reserve. 

The  above  arguments,  all  of  which  were  urged  upon  the 
writer  either  by  officials  or  business  men  in  the  Straits 
Settlements,  did  not  appear  to  be  conclusive  for  the  fol- 
lowing reasons,  which  may  conveniently  be  stated  in  the 
same  order  as  the  objections,  (i)  If  the  rates  for  the  sale 
of  government  drafts  were  fixed  at  the  "gold  points,"  as 
they  presumably  would  be  under  the  gold-exchange  stand- 
ard, and  if  only  drafts  of  large  amounts  were  to  be  sold  by 
the  Government,  redemption  by  the  sale  of  drafts  would 

1  Cf.  infra,  pp.  531-32. 


RAISING  THE  DOLLAR  TO  TWENTY-EIGHT  PENCE    421 

not  interfere  appreciably  more  with  the  business  of  the 
banks  than  would  redemption  in  coin.  Under  these 
circumstances  the  banks  themselves  would  be  the  prin- 
cipal purchasers  of  government  drafts,  as  they  had 
been  in  the  Philippines,1  and  such  drafts  would  be  pur- 
chased and  forwarded  merely  in  lieu  of  the  shipment 
of  sovereigns.  (2)  The  sale  of  telegraphic  transfers, 
while  desirable  in  the  interest  of  currency  elasticity, 
is  by  no  means  a  necessary  feature  of  the  gold-exchange 
standard.  If  the  Government  were  opposed  to  making 
a  minimum  legal  reserve  requirement  of  banks,  it  could 
limit  its  sales  of  drafts  to  demand  drafts  or  even,  if 
need  be,  to  short-time  drafts.  (3)  If  government  notes 
were  redeemable  in  silver  dollars  on  demand,  and  if 
the  silver  dollars  were  redeemable  in  gold  exchange  on 
demand,  depreciation  would  be  impossible  in  a  country 
where  the  people  had  the  confidence  in  the  Govern- 
ment which  they  had  in  the  Straits  Settlements.  (4)  The 
system  of  the  gold-exchange  standard  is  better  suited 
to  a  country  with  a  small  circulation  than  to  one  with 
a  large  circulation.  It  is  evidently  easier  to  maintain  a 
small  reserve  abroad  than  a  large  one,  and  the  functioning 
of  a  small  reserve  under  the  gold-exchange  standard  is  less 
likely  to  be  a  disturbing  factor  in  the  money  market 
where  the  reserve  is  located.  (5)  It  was  not  probable  that 
the  Straits  Settlements  would  require  so  large  a  reserve 
under  the  gold-exchange  standard  as  it  would  under  the 
strict  gold  standard  contemplated.  Under  either  system 
it  would  need  a  sovereign  reserve  and  a  dollar  reserve. 
Under  the  strict  gold  standard  both  reserves  would  be 
located  in  Singapore;  under  the  gold-exchange  standard 
the  dollar  reserve  would  be  located  in  Singapore  and  the 
sovereign  reserve  in  London.  The  sale  of  cable  transfers 
is  not  a  necessary  part  of  the  system,  as  above  pointed  out ; 
and,  even  if  it  were,  the  movement  of  market  rates  of  ex- 

1  Ann.  Rep.  Treas.  Phil.  Islands,  1913,  p.  25. 


422    THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 

change  would  ordinarily  give  ample  warning  of  a  demand 
for  dollar  drafts  or  sovereign  drafts.  Emergency  cases,  if 
such  should  arise,  could  be  met  through  the  temporary 
transfer  of  funds  to  the  gold  reserve  from  the  security  por- 
tion of  the  note  guarantee  fund,  or  through  the  transfer  of 
dollars  to  the  credit  of  the  Home  Government  in  Singapore 
in  exchange  for  an  equivalent  amount  of  sovereigns  placed 
to  the  credit  of  the  Straits  Government  in  London.1  A 
prolonged  and  severe  drain  upon  the  reserve  fund,  which 
in  a  country  like  the  Straits  Settlements  would  be  an 
extremely  improbable  contingency  if  the  Government 
withdrew  from  circulation  dollars  presented  in  the  pur- 
chase of  government  drafts,  could  of  course  always  be  met 
by  the  forward  sale  as  bullion  on  the  London  silver  market 
of  the  redundant  dollars  piling  up  in  the  Government's 
dollar  reserve  in  Singapore.  The  gold-exchange  standard 
would  probably  enable  the  country  to  get  along  with  a 
smaller  gold  reserve  than  would  the  system  contemplated, 
inasmuch  as  it  would  keep  gold  coins  out  of  circulation  and 
the  demands  upon  it  would  be  limited  to  the  requirements 
of  meeting  foreign  trade  balances  —  the  only  monetary  use 
to  which  the  dollars  could  not  be  applied.  The  Straits 
Settlements,  inasmuch  as  it  is  a  country  for  whose  trade 
requirements  silver  coins  are  better  adapted  than  gold, 
and  a  country  which  is  anxious  to  maintain  its  reserve  at 
as  small  an  expense  as  possible,  would  in  fact  seem  to  be  a 
place  peculiarly  adapted  to  the  gold-exchange  standard. 
The  premiums  which  the  Government  would  realize  on  its 
sale  of  exchange,  together  with  the  interest  it  would  obtain 
on  that  part  of  its  reserve  deposited  abroad,  would  doubt- 
less yield  sufficient  profit,  as  in  the  Philippines,  to  pay  the 
expenses  of  administering  the  currency  system  and  to  pro- 
vide in  addition  a  substantial  annual  increment  to  the  gold 
reserve. 

1This  is  a  procedure  extensively  followed  in  the  Philippine  Islands. 
Cf.  supra,  p.  368. 


RAISING  THE  DOLLAR  TO  TWENTY-EIGHT  PENCE    423 

Later  we  shall  see  how  the  logic  of  events  forced  the 
Straits  Government  to  adopt  the  principle  of  the  gold- 
exchange  standard  which  at  this  time  it  contemplated 
rejecting.1 

1  Infra,  pp.  450 -58. 


CHAPTER  IV 

RESULTS  OF  RAISING  DOLLAR  TO  TWENTY-EIGHT 
PENCE 

Now  that  the  events  leading  to  the  declaration  of  the 
28  pence  par  have  been  described,  it  will  be  well  to  in- 
quire concerning  the  effect  of  the  establishment  of  this  new 
unit  of  value  upon  the  trade  of  the  Straits  Settlements  and 
upon  the  relations  between  debtors  and  creditors  and  their 
respective  equities. 

Domestic  Trade 

First  let  us  consider  the  purely  domestic  trade.  It  is  a 
principle  of  monetary  science  that  a  sudden  alteration  in 
the  size  of  the  unit  of  value  does  not  result  in  an  immediate 
and  proportionate  alteration  in  prices.  Custom,  which  is 
to  the  world  of  people  what  inertia  is  to  the  world  of  things, 
tends  under  such  circumstances  to  conserve  existing  prices. 
Time  is  always  required  for  readjustment  of  the  price  level, 
and  the  transition  from  one  price  level  to  another  often  car- 
ries with  it  permanent  results  of  far-reaching  consequence. 
Domestic  prices  in  silver  standard  countries  respond  very 
slowly,  if  at  all,  to  fluctuations  in  the  market  price  of  silver. 
A  Mexican  dollar  had  nearly  the  same  purchasing  power 
in  the  domestic  trade  of  the  Philippine  Islands  in  February 
1903,  when  it  had  a  gold  value  of  37  cents  United  States 
currency,  that  it  had  in  October  1901,  when  it  was  worth 
50  cents.  Later,  when  the  bulk  of  the  money  in  circula- 
tion came  to  be  the  new  money,  prices  seem  to  have  been 
quite  generally  transferred  from  the  old  currency  to  the  new 

424 


RESULTS   OF   RAISING  DOLLAR  TO   28  PENCE        425 

without  any  material  alteration.1  When  the  American 
troops  first  introduced  the  United  States  dollar  into  the 
Philippines,  the  natives  demanded  as  many  American  dol- 
lars for  their  produce  and  wages  as  they  were  accustomed 
to  receive  Mexican  dollars,  and  in  some  cases  they  obtained 
what  they  demanded.  In  time,  of  course,  there  was  a  re- 
adjustment. In  Porto  Rico,  after  the  American  occupa- 
tion, the  currency  of  the  country,  consisting  of  about 
6,000,000  pesos  of  Spanish  money,  was  retired  from  circula- 
tion by  redemption  in  United  States  currency  at  the  rate 
of  one  and  two  thirds  pesos  to  one  dollar  of  United  States 
currency.  The  result  was  a  marked  rise  in  prices  as  meas- 
ured in  gold  values.2 

The  Straits  Settlements  did  not  escape  the  application  of 
this  law.  Prices  and  wages  did  not  at  once  fall  in  proportion 
as  the  sterling  value  of  the  dollar  rose.  When  the  writer 
was  in  Singapore  in  February  1906  the  complaint  was  heard 
on  every  side  that  the  new  two  shilling  and  four  pence 
dollar  would  buy  no  more  in  the  Straits  Settlements  than 
did  the  old  dollar  a  few  years  before,  when  it  was  worth  a 
little  over  a  shilling  and  six  pence.  If  this  was  true,  it  meant 
a  rise  of  prices,  as  measured  in  gold,  of  something  like  50 
per  cent  within  three  years.  The  evidence  seems  to  be 
that  there  was  considerable  truth  in  the  assertion,  al- 
though it  should  be  said  that  other  forces  besides  those 
directly  connected  with  the  currency  had  been  pushing 
prices  upward.  Wage  earners  for  the  most  part  were  re- 
ceiving in  February  1906  about  the  same  number  of  the  new 
dollars  that  they  had  formerly  received  of  the  old.  The 
same  was  true  of  the  salaried  class  in  so  far  as  their  salaries 
were  fixed  in  dollars.  Many  Europeans,  however,  a  few 
years  before  had  complained  bitterly  of  the  losses  they  were 
incurring  by  reason  of  the  depreciation  of  the  dollar,  and 
had  in  consequence  succeeded  in  having  their  salaries  trans- 
ferred to  a  sterling  basis.  The  raising  of  the  dollar  there- 
1  Supra,  pp.  344-45-  2  Supra,  pp.  213-23. 


426    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

fore  led  to  a  proportionate  reduction  in  the  salaries  of  this 
class  as  measured  in  dollars.  Wholesale  prices,  especially 
of  goods  imported  from  gold  standard  countries,  were 
showing  a  strong  tendency  to  decline,  and  several  of  the 
better  classes  of  retail  stores  were  making  price  reductions 
on  most  lines  of  goods  of  from  five  to  ten  per  cent.  The 
great  bulk  of  miscellaneous  expenses,  such  as  professional 
fees,  hotel  rates,  livery  rates,  laundry  charges,  and  the  like, 
showed  no  evidence  of  being  affected  by  the  appreciation  of 
the  dollar.  In  general  it  may  be  said  that  the  readjust- 
ment of  prices  took  place  very  unevenly ;  that  in  no  case 
was  there  a  prompt  decline  proportionate  to  the  rise  in 
the  sterling  value  of  the  dollar;  that  the  readjustment 
was  most  rapid  in  those  lines  where  competition  was  keen, 
as  in  the  case  of  wholesale  prices,  and  least  so  where  com- 
petition was  weak  and  custom  dominant,  as  in  the  case 
of  wages.  It  will  be  observed  that  such  an  uneven  alter- 
ation of  prices  must  have  had  important  consequences  in 
the  distribution  of  wealth  among  the  different  classes  in 
the  community. 

Foreign  Trade 

Next  let  us  consider  the  effect  of  the  raising  of  the  dollar 
upon  the  country's  foreign  trade.  This  trade  may  be 
divided  into  two  parts :  (i)  the  transit  trade ;  (2)  the  ex- 
port trade  in  local  products  and  the  import  trade  in  for- 
eign merchandise  for  domestic  consumption. 

Transit  Trade.  The  Straits  Settlements,  commercially 
speaking,  are  first  of  all  an  entrepot  of  foreign  trade. 
Singapore  is  a  great  distributing  center  between  the  East 
and  the  West.  What  sort  of  influence  did  the  raising  of 
the  unit  of  value  exercise  on  this  transit  trade? 

The  actual  size  of  a  country's  monetary  unit,  so  long  as 
it  is  stable  in  value,  is  a  matter  of  little  importance  to  its 
foreign  trade.  Any  alteration,  however,  in  the  unit  of 
value  is  likely  to  have  temporarily  a  detrimental  effect  on 


RESULTS  OF  RAISING  DOLLAR  TO   28  PENCE       427 

foreign  trade.  A  period  of  currency  reform  is  always 
characterized  by  a  lack  of  confidence  and  by  unsettled 
business  conditions.  Merchants  know  that  important  and 
subtle  influences  are  exercised  upon  trade  profits  by  altera- 
tions in  a  currency  system  and  they  are  naturally  reluctant 
to  turn  their  merchandise  even  temporarily  into  the  money 
of  a  country  undergoing  such  a  reform.  An  unfamiliar  cur- 
rency system,  no  matter  how  good  it  may  be,  is  an  obstacle 
to  foreign  trade.  When  to  these  facts  it  is  added,  that  in 
this  particular  case  the  monetary  unit  was  to  be  raised 
artificially  after  an  uncertain  interval  of  time  to  an  un- 
announced gold  par,  and  ultimately  to  be  maintained  at 
this  par  by  a  gold  reserve  which  it  might  take  years  to 
accumulate  in  sufficient  quantity  to  become  effective,  it 
may  well  be  imagined  that  foreign  traders  were  inclined  to 
be  diffident.  The  writer  found  that  merchants  in  the 
Straits  Settlements  were  complaining  that  the  raising  of 
the  dollar  was  driving  away  the  transit  trade.  There 
seems  to  have  been  such  a  tendency.  It  is  to  be  observed, 
however,  that  the  raising  of  the  dollar  was  only  one  of  sev- 
eral causes  contributing  to  this  result.  For  some  time  there 
had  been  observed  a  tendency  on  the  part  of  oriental  coun- 
tries to  deal  more  and  more  directly  with  Europe  instead  of 
through  ports  of  entrepot.  The  "high  freights  fixed  by  the 
Straits  Homeward  Conference  to  Europe  and  extended  to 
New  York  in  August  [1905]  have  contributed  in  a  marked 
degree  to  the  natural  tendency  for  small  ports  to  expand  and 
establish  direct  steam  communication  with  home  markets."1 
The  fact  that  the  raising  of  the  dollar  was  a  force  cooperating 
with  other  forces  tending  to  reduce  the  Straits  transit  trade, 
or  at  least  to  lessen  the  rate  of  its  growth,  diminished  the 
hope  that  the  result  would  be  but  temporary.2  For  the 

1CL  The  [London]  Times,  Financial  and  Commercial  Supplement, 
Jan.  22,  1906,  p.  41. 

2  The  following  quotation  from  the  Singapore  Free  Press  of  February  8, 
1906,  concerning  the  trade  with  Siam,  is  apposite:  "One  of  the  most  in- 


428    THE   STRAITS   SETTLEMENTS   CURRENCY  REFORM 

next  four  years,  i.e.,  until  1910,  the  Straits  foreign  trade  was 
not  satisfactory.1  The  official  figures,  however,  do  not 
differentiate  the  transit  trade  from  the  other  trade.  This 
fact  and  the  existence  of  other  disturbing  factors,  including 
new  regulations  in  connection  with  the  opium  trade  with 
India,  make  it  impossible  to  draw  any  safe  conclusions  from 
the  trade  figures  as  to  the  long-time  influence  upon  the 
transit  trade  of  the  rise  in  the  Straits  dollar. 

Export  Trade  in  Local  Products  and  Import  Trade  in 
Goods  for  Home  Consumption.  It  is  a  generally  accepted 
principle  that  a  falling  exchange  has  a  tendency  to  favor 
export  trade  at  the  expense  of  import  trade,  and  a  rising 
exchange  to  favor  import  trade  at  the  expense  of  export 
trade.2  Prices  and  wages,  as  previously  observed,  respond 

teresting  features  of  the  Bangkok  trade  last  year  was  the  marked  develop- 
ment of  a  tendency  to  send  orders  direct  to  Europe  instead  of  to  the  Singa- 
pore middleman.  In  the  past,  the  Chinese  importer,  a  very  important  factor 
in  the  year's  total,  dealt  invariably  with  Singapore  or  in  a  small  measure  with 
Hongkong  houses.  To-day,  says  the  Bangkok  Times,  'the  saving  of  the 
middleman's  profit  has  become  a  matter  of  some  importance,  and  notwith- 
standing Singapore's  advantage  in  being  near  at  hand,  the  proportion  of 
direct  orders  in  the  total  has  been  growing  for  some  time.  This  tendency 
has  now  been  accentuated  by  the  exchange  difficulty,  and  it  is  doubtful  if 
any  improvement  is  to  be  looked  for  there.' " 

1  Measured  in  dollars  the  total  foreign  trade  of  the  Straits  was  as  follows. 
It  should  be  noted  that  the  figures  after  1905  are  expressed  in  terms  of  a 
dollar  more  valuable  in  terms  of  gold.    Figures  are  in  millions. 

Average,  1901-05     1906  1907          1908  1909          1910 

Imports  315.5  317-8          322.9          296.6          301.3          345-4 

Exports  262.4  281.3          282.2          262.5          267.5         307-7 

S.  S.  Ann.  Reps.,  passim. 

As  noted  on  the  preceding  page  much  of  the  trade  with  Siam  is  transit 
trade.  For  the  years  1904-08  the  trade  with  Siam  and  the  Siam  West 
Coast  (in  millions  of  dollars)  was  as  follows : 

1904  1905  1906  1907 
Imports  28.1  30.8  33.5  30.0 
Exports  16.4  16.2  18.2  17.8 

S.  S.  Ann.  Reps.,  passim. 

2  The  rates  are  assumed  to  be  quoted  in  terms  of  foreign  money,  viz.  the 
number  of  English  pence  to   the  Straits  dollar.     For  discussions  of  this 
principle  see  infra,  pp.  479-83,  and  supra,  pp.  24-28. 


RESULTS  OF   RAISING  DOLLAR  TO   28  PENCE       429 

slowly  if  at  all  to  alterations  in  the  value  of  the  monetary 
unit  as  measured  by  the  foreign  exchanges.  As  a  result,  in 
a  country  like  the  Straits  Settlements,  an  importer  of  mer- 
chandise from  gold  standard  countries  received  practically 
the  same  number  of  dollars  for  his  merchandise  and  paid 
for  it  practically  the  same  gold  prices  for  a  short  time  after 
a  rise  or  fall  in  exchange  as  before.  If  exchange  went  up, 
he  therefore  tended  to  profit  by  the  higher  gold  value  of  the 
local  dollar,  and  if  it  went  down,  per  contra  he  tended  to 
lose.  The  exporter  in  like  manner  continued  for  a  time 
after  an  alteration  in  exchange  to  pay  essentially  the  same 
wages  and  the  same  prices  for  the  produce  he  exported  as 
before,  and  to  obtain  the  same  gold  prices  for  his  exports. 
He  accordingly  tended  to  profit  to  the  extent  of  a  fall 
in  exchange  and  to  lose  to  the  extent  of  a  rise.  These 
gains  and  losses  were  of  a  temporary  character,  and  sooner 
or  later  readjustments  took  place.  In  the  long  run  the 
prosperity  of  the  export  trade  and  of  the  import  trade  are 
inseparably  linked  together,  because  it  is  the  one  that  pays 
for  the  other.  The  extent  of  these  temporary  profits  or 
losses,  as  the  case  may  be,  the  length  of  time  during  which 
they  are  realized,  and  the  persons  to  whom  they  accrue, 
depend  upon  the  comparative  strength  of  the  markets  and 
of  the  different  parties  to  the  transaction.  Take,  for  ex- 
ample, the  case  of  a  rising  exchange.  Where  competition 
among  the  importers  of  a  given  commodity  is  keen,  or  where 
the  price  in  the  importing  country  is  for  any  other  reason 
weak,  local  prices  will  soon  fall  on  a  rising  exchange  and 
the  consumer  will  be  the  benefited  party.  Where  compe- 
tition among  importers  is  weak  in  the  importing  country, 
or  the  price  of  the  commodity  is  for  any  other  reason 
strong,  the  importer  will  reap  the  benefit  of  a  rising  ex- 
change.1 Where  the  sellers  of  the  article  in  the  exporting 
country  are  in  a  position  to  control  the  price,  either  by 

1  In  such  cases,  of  course,  the  profit  may  be  realized  in  part  by  the  im- 
porter, in  part  by  the  wholesaler,  and  in  part  by  the  retailer. 


430    THE  STRAITS   SETTLEMENTS   CURRENCY  REFORM 


combination  or  otherwise,  they  may  be  able  to  reap  the 
profit  by  advancing  their  prices  as  exchange  rises.  The 
same  principle  applies  to  the  export  trade  on  a  rising  ex- 
change. If  competition  among  producers  is  weak  and  the 
demand  for  the  commodity  in  question  is  strong,  the  bur- 
den of  the  advance  in  exchange  may  be  shifted  to  the  buyer 
or  to  the  foreign  consumer.  Where  the  supply  of  labor 
employed  in  the  production  of  the  commodity  is  excessive 
and  the  wage  earners  are  not  organized,  the  burden  may 
be  shifted  to  the  laborer.  Where,  on  the  other  hand,  the 
foreign  market  is  weak  and  the  labor  supply  limited  or 
thoroughly  organized,  the  burden  may  be  shifted  to  the 
producer  or  to  the  exporting  merchant. 

Let  us  apply  these  principles  to  the  trade  of  the  Malay 
Peninsula  during  the  period  of  the  appreciation  of  the 
dollar.  Figures  for  the  price  movements  of  certain  staple 
exports  are  given  below.  From  them  and  other  evidence 
the  following  conclusions  may  be  drawn. 

PRICES  OF  CERTAIN  STAPLE  EXPORTS* 
TIN 


1905 

PURCHASED 

PRICE  PER  PICUL 

LONDON  PRICE  PER  TON 

Month 

Tons 

High 

Low 

High 

Low 

$ 

$ 

£       s.      d. 

£        s.    d. 

January       .     . 

3539 

79-50 

77.25 

132    10 

130     2   6 

February     .     . 

1510 

77-25 

76.50 

131 

129  12  6 

March    . 

2I2O 

80.375 

76.625 

134    15 

129  10 

April 

3275 

81.625 

79.50 

136      5 

134 

May.     .     .     . 

2565 

80.375 

79.00 

136      2    6 

132   15 

June  .... 

2770 

8i.75 

79.625 

138    17    6 

135       2    6 

July  .... 

2640 

88.00 

81.25 

150 

139     26 

August   .     .     . 

1635 

86.875 

82.875 

151    10 

i47     5 

September  .     . 

l62O 

83-50 

80.125 

148 

144  12  6 

October  .     .     . 

2725 

82.00 

80.00 

148      2    6 

146     5 

November  . 

2775 

84.00 

80.875 

155  15 

148     5 

December  2  .     . 

3320 

88.75 

83.75 

164    10 

157 

1  Based  upon  the  Yearly  Statement  of  the  Singapore  Chamber  of  Com- 
merce, 1905. 

2  There  was  a  further  increase  in  the  export  of  tin  in  1906  amounting  to 


RESULTS  OF   RAISING   DOLLAR  TO   28  PENCE        431 
BLACK  PEPPER 


1905 

PURCHASED 

PRICE  PER  PICUL 

LONDON  PRICE  PER  POUND 

Month 

Tons 

High 

Low 

High 

Low 

$ 

$ 

d. 

d. 

January       .     . 

1117 

29.25 

25.75 

si 

5f 

February     . 

935 

26.55 

25.00 

Si 

Si 

March    .     .     . 

888 

26.50 

25-2S 

sf 

si 

April       .     .     . 

1357 

26.375 

25.70 

5l 

Sf 

May.     .     .     . 

1615 

26.25 

25-50 

Sf 

Si 

June  .... 

H35 

28.625 

25-75 

Sf 

51 

July.      .     .     . 

660 

29.00 

27.30 

51 

si 

August   . 

938 

29.00 

28.00 

6 

sit 

September  . 

631 

28.25 

25-50 

6 

sH 

October  .     .     . 

73i 

26.375 

24-75 

Sit 

5l 

November   . 

499 

24-75 

23-50 

sH 

Stt 

December    .     . 

IS42 

24.00 

20.75 

sH 

sf 

GAMBIER  (not  including  Cube) 


1905 

PURCHASED 

PRICE  PER  PICUL 

LONDON  PRICE  PER  HUNDRED- 
WEIGHT 

Month 

Tons 

High 

Low 

High 

Low 

$ 

$ 

s.    d. 

s,    d. 

January       .     . 

2557 

9-30 

8-75 

20 

19  6 

February     .     . 

882 

9.125 

8-75 

20 

19  6 

March    . 

2609 

9.00 

8-75 

19  9 

19  3 

April       .     .     . 

1704 

9.00 

8.60 

19  3 

19 

May.     .     .     . 

3530 

8.85 

8-575 

19 

18  9 

June.     .     .     . 

1959 

8.75 

8.60 

18  9 

18  9 

July.     .     .     . 

2189 

9.00 

8.65 

18  9 

18  9 

August   .     .     . 

2312 

9.00 

8.50 

19  9 

19  6 

September  .     . 

2420 

8-75 

8-575 

19  9 

19  9 

October  .     .     . 

3262 

8-45 

7-875 

19  9 

19  9 

November  . 

3205 

8.10 

7.875 

20  3 

19  9 

December    .     . 

3973 

8.00 

7.70 

20 

20 

The  rise  of  the  dollar  did  not,  as  many  anticipated,  prove 
detrimental  to  the  tin  trade.     Tin  is  the  principal  item  of 

about  $8,000,000 ;  the  average  price  per  picul  for  the  year  being  $89.90,  an 
increase  of  115  per  cent  over  that  of  1905.  S.  S.  Ann.  Report,  1906, 
P-  14. 


432    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

export  from  the  Malay  Peninsula.  The  Federated  Malay 
States  were  contributing  about  seventy  per  cent  of  the  world's 
supply  of  tin.  The  production  of  that  staple  was  constant 
and  the  market  was  strong ;  as  a  result  the  tin  merchant  was 
able  to  shift  the  burden  of  the  rise  in  exchange  to  the  foreign 
consumer.  The  same  was  true  to  a  lesser  extent  of  tapi- 
oca.1 On  the  other  hand,  pepper  and  gambier,  two  im- 
portant items  in  the  Straits  Settlements'  export  trade,  had 
weak  markets  during  the  period  of  the  appreciation  of  the 
dollar ;  and  this  fact,  accompanied  by  a  strong  competition 
among  the  producers  of  these  articles,  resulted  in  declining 
dollar  prices  and  the  imposing  of  the  burden  of  the  rise  in 
exchange  upon  the  exporter  and  the  producer. 

The  supply  of  labor  was  so  scarce  in  the  Malay  Peninsula 
that  the  raising  of  the  gold  value  of  the  dollar  did  not 
result  in  any  appreciable  reduction  in  wages  among  the 
laborers  engaged  in  the  production  of  articles  for  export. 

The  import  trade  of  the  Malay  Peninsula,  aside  from 
the  transit  trade,  is  made  up  of  such  a  variety  of  com- 
modities and  is  in  the  hands  of  so  many  traders,  that  it  is 
impossible  to  form  any  very  definite  opinion  as  to  the 
effect  upon  it  of  the  rise  in  exchange.  As  in  the  case  of 
the  export  trade,  different  articles  were  affected  differently, 
according  to  the  conditions  of  their  respective  markets  and 
the  relative  strength  of  the  various  parties  in  the  trade. 
It  may  safely  be  said  that  the  import  trade  received  noth- 
ing like  the  stimulus  that  would  naturally  have  been  ex- 
pected from  such  a  decided  rise  in  exchange,  and  this  for 
two  reasons:  (i)  the  unsettled  condition  of  all  kinds  of 

1  It  is  impossible  to  say  what  the  course  of  tin  and  tapioca  prices  would 
have  been  in  London,  had  the  value  of  the  Straits  Settlements  dollar  not 
been  raised,  and  to  what  extent  the  producers  of  these  articles  might  not  have 
realized  additional  profits  under  such  a  contingency.  It  may  well  have 
been  that  the  rise  in  exchange  merely  hastened  an  upward  movement 
of  prices  which  would  in  time  have  taken  place  anyway.  It  should  be 
noted,  moreover,  in  this  connection  that  exporters  of  such  articles  realized 
in  some  cases  additional  profits  by  speculating  in  their  sterling  bills. 


RESULTS  OF  RAISING  DOLLAR  TO   28  PENCE       433 

business  while  the  currency  reform  was  in  progress  and,  in 
particular,  the  unwillingness  of  merchants  to  replenish 
their  stocks;  and  (2)  the  neglect  of  normal  legitimate 
business  on  the  part  of  business  men  for  the  purpose  of  en- 
gaging in  exchange  speculation. 

The  business  of  the  Straits  Settlements  during  the 
year  can  hardly  be  said  to  have  been  slack ;  it  was,  on 
the  contrary,  at  least  during  the  eight  months  ending 
January  31,  1906,  active  and  exciting,  and  the  volume  of 
transactions  was  large;  but  this  activity  was  principally 
confined  to  transactions  either  purely  or  largely  of  a  spec- 
ulative character ;  and  if  such  transactions  are  eliminated, 
it  may  be  safely  said  that  business  in  the  Straits  during 
the  period  of  appreciation  was  bad.  This  the  writer 
found  to  be  the  general  opinion  among  merchants  of  the 
colony.  The  Singapore  correspondent  of  the  London  Times 
summed  up  the  situation  in  his  letter  of  December  i, 
1905  by  saying:  "Not  for  fifteen  years  has  this  Colony 
experienced  such  bad  times,  and  even  now  signs  of  a 
revival  are  by  no  means  hopeful."  l 

Debtor  and  Creditor 

There  is  perhaps  no  consideration  of  more  vital  impor- 
tance in  any  currency  reform  than  that  of  its  effect  upon 
existing  debts.  A  debtor  borrows  purchasing  power  in  the 
form  of  money  and,  in  an  ideal  system,  he  would  pay  back 
the  same  purchasing  power  with  interest,  except  to  the 
extent  that  prices  may  have  been  modified  in  the  interim 
by  factors  affecting  the  production  of  commodities,  such  as 
improved  methods,  exhaustion  of  natural  supplies,  and  the 
like,  in  which  cases  the  amounts  repaid  should  be  so  altered 
that  the  gains  or  losses  thus  arising  should  be  equitably 
shared  between  debtor  and  creditor.  While  such  an  ideal 

1  The  [London]  Times,  Financial  and  Commercial  Supplement,  January 
22,  1906,  p.  41. 

2F 


434    THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 


system  is  of  course  unattainable  in  practice,  currency  sys- 
tems should  be  so  framed  as  to  approach  the  ideal  as  nearly 
as  practicable.  A  rapidly  depreciating  currency  works  a 
grave  injustice  to  the  creditor  class  ;  a  rapidly  appreciating 
currency  works  an  even  more  serious  injustice  to  the  debtor 
class.  The  bimetallic  controversy  which  stirred  up  three 
continents  for  upwards  of  a  quarter  of  a  century  found  its 
raison  d'etre  very  largely  in  the  injustice  to  the  debtor  class 
resulting  from  a  monetary  regime  in  which  the  unit  of  value 
appreciated  by  something  like  44  per  cent  J  in  the  twenty- 
five  years,  1873-97. 

In  the  light  of  these  familiar  principles  let  us  look  at  the 
recent  experience  of  the  Straits  Settlements.  The  follow- 
ing figures  will  show  in  a  general  way  the  appreciation  of 
the  dollar  as  compared  with  gold  during  the  years  1902- 


oS: 


2 


APPRECIATION  OF  THE  DOLLAR 


jgO2 

STERLING  TELEGRAPHIC  TRANSFERS 

High 

Low 

Mean 

Average 

d. 
22f 

23l 

d. 

i8f 

d. 
20| 

— 

1903       

i9°4      

23! 

2IT9ff 

— 

22  If 

1905 
Jan.-June  .     .     . 
July-Dec.    .     .     . 

26| 

3A 

— 

23f9 

1  The  index  number  of  the  Sauerbeck  tables  for  1873  is  in,  and  for  1897 
is  62. 

2  Sterling  exchange  figures  by  months  are  given  in  Appendix  A,  pp. 
460-61. 

The  average  annual  sterling  rates  of  exchange  in  Singapore  for  four- 
months  bank  paper  for  the  period  1890  to  1901,  as  given  in  the  annual  reports 
of  the  Governor  of  the  Straits  Settlements,  were  as  follows  : 

1890  .  .  35.    s$d.  1894   .  .  2s.    2d,  1898  .  .  is.    aid. 

1891  .  .  35.    2>d.  1895    .  .  2s.     i$d.  1899  .  .  is.    I  life. 

.  1900    .    .    2S.      IOrV- 


1892  .  .  25.   loft/. 

1893  .  .  2s. 


1896  .  .  2S. 

1897  •  •  is. 


1901 


RESULTS  OF   RAISING  DOLLAR  TO   28  PENCE        435 


APPRECIATION  OF  THE  DOLLAR  IN  ITS  RELATION  TO  CERTAIN 
STERLING  RATES 


PERCENTAGE 

PERCENTAGE 

INCREASE  OF  Two  SHILLING 

INCREASE  or  Two  SHILLING 

DOLLAR  OVER 

FOUR  PENCE  DOLLAR  OVER 

High 

Low 

Mean 

Average 

High 

Low 

Mean 

Average 

1902 

7-3 

30.6 

I7.8 

— 

25.1 

S2-4 

37-4 

— 

1903    .    . 

i.i 

27.2 

12.6 

— 

17.9 

48.3 

31-4 

— 

1904     .    . 

o-S 

n-3 

— 

4.6 

17-3 

29.8 

— 

22.0 

1905 

Jan.  -June  . 

0-5 

2.4 

— 

1.6 

17-3 

19.4 

— 

I8.S 

July-Dec.  . 

-9-91 

0.8 

~ 

-5-I1 

5-2 

17.9 

~ 

10.8 

A  glance  at  the  above  table  will  show  that  debtors  having 
time  obligations  in  the  old  currency  contracted  between 
the  years  1902  and  1906  suffered  serious  injustice  in  being 
compelled  to  settle  those  obligations  at  par  in  the  new  dol- 
lar. Those  persons  who  contracted  debts  when  the  ster- 
ling value  of  the  dollar  was  lowest  and  invested  the  bor- 
rowed funds  in  gold  standard  countries  were  the  heaviest 
sufferers.  Those  who  contracted  obligations  when  the 
sterling  value  of  the  dollar  was  highest  and  invested  the 
proceeds  locally,  and  who  settled  their  indebtedness  be- 
fore prices  and  wages  became  adjusted  to  the  new  unit  of 
value,  suffered  least.  Between  these  extremes  the  in- 
justice suffered  was  of  varying  degrees.  There  were  prob- 
ably few  instances  of  time  obligations  in  the  Malay  Penin- 
sula in  which  the  debtor  was  not  to  some  extent  deprived  of 
his  property  unjustly  by  reason  of  this  artificial  increase 
in  the  country's  unit  of  value.2 

1  Decrease. 

z  In  considering  the  extent  of  the  appreciation  of  the  dollar  during  the 
period  1902-06  and  the  injustice  thereby  done  to  the  debtor  class,  allow- 
ance should  be  made  for  two  factors  which  to  a  small  degree  alleviated  the 
situation  of  that  class :  (i)  Those  years  were  characterized  by  a  slight  de- 
preciation of  gold  in  the  world's  markets,  as  evidenced  by  standard  tables 
of  price  index  numbers.  (2)  Eliminating  fluctuations  in  prices  arising  from 


436    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

But,  it  may  be  asked,  did  not  the  Government  take 
measures  to  provide  for  the  equitable  adjustment  of 
such  time  obligations?1  To  this  question  it  must  be 
answered  that  not  only  was  no  such  action  taken,  but 
that  there  is  no  evidence  that  it  was  ever  considered  by 
the  Straits  Settlements  Currency  Committee  which  recom- 
mended the  plan  adopted,  by  the  Governor  and  legislative 
councilors  who  put  it  into  operation,  or  by  the  local  cham- 
bers of  commerce  which  rendered  frequent  assistance  to 
the  Government  by  their  advice  and  recommendations.2 

Local  officials  and  business  men  attempted  to  justify  the 
Government's  policy  of  inaction  in  this  matter  on  a  number 
of  grounds.  The  following  reply  to  the  criticism  above 
stated  was  made  to  the  writer  by  a  prominent  banker  in 
Singapore,  and  may  be  considered  as  fairly  representative 
of  the  attitude  of  most  local  officials  and  business  men  on 
the  subject : 

alterations  in  the  unit  of  value  per  se,  the  general  tendency  of  local  prices  was 
undoubtedly  upward  in  the  Malay  Peninsula  during  this  period. 

1  Such  measures  have  been  taken  in  recent  years  in  Samoa,  Porto  Rico, 
and  the  Philippines.  They  have  received  most  careful  consideration  in  the 
recent  discussions  concerning  monetary  reform  in  Mexico  and  China. 

The  Philippine  Government,  in  its  currency  reform,  passed  an  act  for  the 
protection  of  the  debtor  class,  authorizing  debtors  having  time  obligations 
payable  in  the  old  currency  to  tender  payment  in  the  new  currency  at  such 
a  rate  of  exchange  as  would  fairly  represent  the  value  of  the  old  currency  in 
terms  of  the  new  on  the  date  the  obligations  should  become  due.  In  de- 
termining this  rate  the  debtor  was  directed  to  take  into  account  the  market 
price  of  silver,  exchange  rates  in  Hongkong,  and  various  other  factors  which 
would  be  expected  to  throw  light  on  the  gold  value  the  old  currency  would 
have  had  in  Manila  had  it  continued  to  circulate.  If  the  creditor  refused 
to  accept  the  new  currency  in  settlement  of  the  obligation  at  a  rate  of  ad- 
justment so  determined  and  sought  the  enforcement  of  the  original  contract 
in  any  court,  the  law  provided  that,  upon  the  establishment  of  the  plaintiff's 
claim,  "it  shall  be  the  duty  of  the  court  to  render  judgment  for  the  plaintiff 
to  recover  as  damages  the  lawful  sum  due  to  him,  in  Philippine  pesos,  in- 
stead of  in  the  currency  mentioned  in  the  contract,"  the  basis  for  comput- 
ing the  damages  being  the  same  as  that  previously  mentioned,  according 
to  which  the  debtor  was  to  compute  the  amount  of  his  local  currency  debt 
in  terms  of  Philippine  currency.  Cf.  supra,  p.  339,  and  infra,  pp.  506-508. 

3  One  of  the  members  of  the  legislative  council  informed  the  writer  that 
this  subject  was  never  discussed  by  that  body. 


RESULTS  OF  RAISING  DOLLAR  TO   28  PENCE       437 

"  No  action  on  the  part  of  the  Government  for  the  protec- 
tion of  the  debtor  class  was  necessary.  Time  obligations 
were  contracted  in  the  money  of  the  country  without  refer- 
ence to  its  gold  value,  and  should  be  paid  dollar  for  dol- 
lar in  the  money  of  the  country  which  should  be  legal 
tender  when  the  obligations  became  due,  regardless  of  any 
change  that  may  have  taken  place  in  its  gold  value  in  the 


This  argument  represents  an  attitude  which  is  perhaps 
natural  to  people  who  have  been  in  the  habit  of  dealing  in 
a  fluctuating  currency.  Even  if  it  be  admitted  that  per- 
sons entering  into  contracts  for  the  payment  of  money 
covering  a  period  of  years  knowingly  assume  the  risks  aris- 
ing from  natural  fluctuations  in  the  unit  of  value,  it  does 
not  follow  that  they  can  justly  be  expected  to  bear  the 
burdens  resulting  from  alterations  in  that  unit  which  are 
artificial  and  which  they  could  in  no  manner  have  antici- 
pated. In  fact,  debtor  and  creditor  alike  have  reason  to 
expect,  as  a  matter  of  justice,  that  if  the  Government  finds 
it  desirable  materially  to  alter  the  unit  of  value  in  which 
existing  contracts  are  stated,  it  will  at  the  same  time  see  to 
it  that  debtors  (in  case  the  unit  of  value  is  raised)  shall 
either  be  permitted  to  pay  their  obligations  in  the  cur- 
rency in  which  they  were  contracted,  or  to  commute  them 
at  equitable  rates  in  the  new  currency ;  and  that  creditors 
(in  case  the  unit  of  value  is  lowered)  shall  in  like  manner 
be  legally  authorized  to  insist  upon  similar  terms  of  settle- 
ment. There  is  no  limit  to  the  exploitation  of  one  class  for 
the  benefit  of  another  that  Governments  may  sanction  by 
altering  the  unit  of  value,  if  in  so  doing  they  pay  no  regard 
to  the  equities  of  existing  contractual  relations. 

The  Government's  policy  of  inaction  in  this  matter  was, 
however,  defended  on  other  grounds  of  a  more  substantial 
character,  for  which  due  allowance  should  be  made  in 
passing  judgment  on  the  course  pursued.  It  was  stated 
that  the  Straits  Settlements  are  preeminently  a  trading 


438    THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 

country,  as  contrasted  with  agricultural  and  industrial 
countries,  and  that  the  number  of  long-time  obligations 
was  in  consequence  relatively  small.  This  is  probably 
true,  although  no  figures  are  available  showing  the  extent 
to  which  such  time  obligations  existed.  It  must  be  remem- 
bered, however,  that  the  new  currency  was  not  limited  in  its 
circulation  to  the  Straits  Settlements  proper,  but  was  the 
money  of  the  Federated  Malay  States  and  other  depend- 
encies as  well,  and  that  the  economic  activities  of  these 
dependencies  were  not  preeminently  those  of  trade  but 
rather  of  agriculture  and  mining.  The  number  of  such  ob- 
ligations may  possibly  not  have  been  great  in  the  Straits 
Settlements  currency  area  as  compared  with  other  countries ; 
but  that  fact  gave  scant  comfort  to  those  who  suffered,  and 
their  number  in  the  absolute  was  unquestionably  large. 
The  strongest  argument  urged  in  justification  of  the  po- 
sition taken  consisted  in  the  statements  that  the  debtor 
class  in  the  Malay  Peninsula  had  invested  their  borrowings 
principally  in  that  territory,  and  that  their  investments 
were  not  of  a  character  which  are  greatly  influenced  by  the 
sterling  value  of  the  dollar;  that  the  two  shilling  four 
pence  dollar  had  little  more  purchasing  power  within  the 
Peninsula  than  the  old  dollar  possessed  one,  two,  or  more 
years  before ;  and  that  any  measure  which  permitted  the 
debtor  to  pay  his  debts  in  a  number  of  new  dollars  smaller 
than  the  number  of  old  dollars  called  for  in  the  contract 
would  have  worked  an  injustice  to  the  creditor,  in  so  far 
as  he  should  spend  the  money  received  within  the  terri- 
tory in  which  the  currency  circulated.  This  argument 
certainly  has  weight.  There  is  no  question  that  a  law 
authorizing  the  commutation  of  time  obligations  on  the 
basis  of  the  gold  value  the  British  dollar  would  have  had 
in  the  Straits  Settlements,  had  its  circulation  not  been  dis- 
continued, would  in  many  cases  have  worked  hardship  to 
the  creditor  class.  When  due  allowance,  however,  is  given 
to  this  consideration,  the  weight  of  the  argument  appears 


RESULTS  OF  RAISING  DOLLAR  TO   28  PENCE       439 

to  be  in  the  other  direction.  The  injustice  referred  to  would 
have  affected  those  creditors  only  who  were  paid  during 
the  short  period  of  transition  while  prices  were  being  re- 
adjusted to  the  new  unit  of  value,  and  it  would  not  have 
affected  all  of  them,  but  only  such  as  chose  to  reinvest  their 
money  in  the  Straits  currency  area  during  the  short  period 
before  prices  became  readjusted. 

It  appears,  accordingly,  that  the  Straits  Settlements  cur- 
rency reform  was  effected  at  the  cost  of  a  great  temporary 
disturbance  to  the  country's  trade,  both  domestic  and 
foreign,  besides  the  permanent  loss  of  some  portion  of  its 
transit  trade;  and  that  it  worked  an  injustice  to  the 
debtor  class. 

Advisability  of  a  Recoinage  in  1905  and  of  a  Two  Shilling  Par 

Without  attempting  to  discuss  the  question  whether  it 
would  not  have  been  wise  for  the  Straits  to  go  immediately 
upon  a  gold  basis  instead  of  following  the  Indian  plan, 
let  us  inquire  whether  it  would  not  have  been  possible  to 
eliminate  largely  the  evil  results  experienced,  and  at  the 
same  time  to  preserve  most  of  the  important  features  of 
the  Currency  Committee's  plan. 

Although  the  Currency  Committee  did  not  state  in  its 
recommendations  at  what  sterling  par  the  dollar  should 
ultimately  be  fixed,  the  public  generally  believed,  as  pre- 
viously stated,  that  the  par  to  be  adopted  would  be  about 
two  shillings.  It  may  be  said  authoritatively  that  this 
was  the  par  the  Currency  Committee  had  hoped  would  be 
established,  and  that  in  this  hope  the  officials  of  the  Home 
Country  and  of  the  Colony  heartily  concurred.  The  defini- 
tive adoption  of  the  two  shilling  par  was  postponed  only 
because  it  was  feared  that  the  future  course  of  silver  might 
be  such  as  to  endanger  the  melting  down  of  the  dollars  at 
that  par.  The  weight  and  fineness  of  the  dollar,  once  de- 
cided upon,  seem  to  have  been  assumed  to  be  unalterable. 


440    THE  STRAITS   SETTLEMENTS   CURRENCY  REFORM 

The  silver  content  of  the  dollar  was  the  fixed  thing,  so  the 
Currency  Committee  appears  to  have  reasoned;  the  unit 
of  value  was  the  alterable  thing ;  this  was  to  be  adjusted 
to  the  coin,  and  to  be  fixed  at  such  a  rate  as  to  allow  a  safe 
margin  above  bullion  value.1  But,  one  would  naturally 
ask,  why  not  reverse  the  procedure?  The  bullion  value 
of  properly  secured  fiduciary  coins  is  largely  a  question  of 
convenience.  The  bullion  content  should  of  course  not 
be  so  small  as  to  render  the  coins  inconvenient  to  handle  or 
to  give  undue  encouragement  to  counterfeiting,  nor  so  large 
as  to  endanger  their  being  melted  down.  Within  these 
limits,  however,  the  bullion  content  of  a  fiduciary  coin  is 
a  matter  of  comparative  indifference.  The  unit  of  value, 
on  the  other  hand,  is  a  matter  of  the  utmost  importance. 
Alterations  in  the  unit  of  value,  by  their  uneven  effects 
upon  the  prices  of  various  classes  of  commodities  and  upon 
wages,  and  by  the  derangement  they  cause  in  the  relations 
existing  between  debtor  and  creditor,  profoundly  affect  the 
whole  economic  structure.  Variations  in  the  value  of  the 
precious  metals  have  frequently  compelled  countries  to  alter 
the  weight  and  fineness  of  their  coins.  Within  a  short 
time  Japan 2  and  the  Philippines 3  have  taken  measures  in 
this  direction  as  a  result  of  the  rise  in  the  price  of  silver. 
The  Straits  Settlements,  however,  afford  the  only  instance 
in  recent  monetary  history  of  a  material  alteration  in  the 
unit  of  value  deliberately  made  to  meet  such  a  contingency. 
Suppose  the  British  authorities  had  taken  this  view  of 
the  problem,  what  course  would  they  have  followed? 
In  the  first  place  they  would  probably  have  announced  a 
two  shilling  par  at  the  beginning  as  part  of  the  regular 
scheme,  although  such  an  announcement  would  not  have 

1  Cf .,  for  the  attitude  of  Mexico  on  this  subject,  Leyes  y  Disposiciones  Rel- 
ativas  a  la  Reforma  Monetaria  (Mexico,  1905),  pp.  21-26;   also  infra,  pp. 

539-4I- 

2  Kemmerer,  The  Recent  Rise  in  the  Price  of  Silver  and  Some  of  Its  Mone- 
tary Consequences,  in  Quart.  Journ.  Econ.,  XXVI  (1912),  pp.  261-63. 

3  Supra,  pp. 


RESULTS  OF  RAISING  DOLLAR  TO   28   PENCE        441 

been  necessary.  The  procedure  would  otherwise  have 
been  essentially  the  same  as  that  actually  followed  down 
to  about  November  or  December  1905.  By  that  tune  the 
Government  had  discontinued  redeeming  the  old  dollars 
and  the  work  of  recoinage  had  been  completed.  It  was  at 
that  time,  moreover,  clearly  evident  that  the  silver  market 
was  such  as  to  place  a  two  shilling  dollar  containing  416 
grains  of  silver  .900  fine  in  grave  danger  of  the  melting- 
pot.  As  soon  as  this  fact  was  realized  the  Government 
would  have  adopted  the  course  later  adopted  by  the  Phil- 
ippines and  Japan ;  it  would  have  taken  measures  for  the 
immediate  recoinage  of  the  new  dollars  at  a  much  smaller 
fine  silver  content ;  and,  inasmuch  as  this  recoinage  would 
have  yielded  a  substantial  seigniorage  profit  and  as  there 
probably  would  have  been  some  reluctance  at  first  on  the 
part  of  the  public  to  receive  the  lighter  weight  dollar  as 
the  equivalent  of  the  old,  it  would  have  used  this  profit 
as  the  nucleus  of  a  gold  reserve  fund,  supplementing  it 
perhaps  by  a  temporary  draft  on  the  security  portion 
of  the  note  guarantee  fund  and  by  the  floating  of  bonds 
sufficient  to  make  the  reserve  adequate  for  immediate 
use.  The  new  dollars  would  have  been  made  redeem- 
able in  gold  or,  better,  in  gold  exchange,  as  rapidly  as 
they  were  placed  in  circulation,  and  dollars  would  at  the 
same  time  in  like  manner  have  been  offered  for  gold  or 
gold  exchange.  Under  such  a  procedure  there  would  have 
been  little  dislocation  of  prices ;  the  long  period  of  specu- 
lation which  so  unsettled  trade  would  have  been  largely 
eliminated ;  the  status  of  existing  contracts  would  not  have 
been  materially  interfered  with ;  and  the  country  would  have 
been  established  firmly  on  the  gold  standard  by  the  autumn 
of  1905,  with  a  unit  of  value  better  suited  to  its  permanent 
needs  than  is  the  present  one.  Under  these  circumstances, 
the  rise  in  the  price  of  silver  would  have  proved  a  boon  to 
the  Straits,  as  it  did  to  Mexico,1  rather  than  a  handicap. 

1  Infra,  pp,  538-47. 


442    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

To  the  above  plan,  when  suggested  by  the  writer  to 
officials  and  business  men  in  the  Straits  Settlements,  four 
objections  were  urged :  (i)  the  difficulty  of  calling  in  the 
new  Straits  dollars  which  by  the  autumn  of  1904  had  be- 
come very  widely  scattered,  many  of  them  having  gone 
outside  of  the  country ;  (2)  the  expense  of  the  recoinage ; 
(3)  the  expense  of  establishing  a  reserve;  (4)  the  danger 
that  the  public  would  not  accept  a  dollar  of  lighter  weight. 

The  first  objection  was  superficial.  In  the  autumn  of 
1904  the  new  Straits  dollar  was  nothing  more  nor  less  than 
a  silver  standard  dollar,  which  the  Government  had  ex- 
changed at  par  for  another  silver  standard  dollar,  and 
which  carried  its  value  with  it  in  the  silver  it  contained. 
The  Government  had  received  full  value  for  these  dollars 
when  it  placed  them  in  circulation,  and  it  would  not  have 
been  a  matter  for  Government  concern  if  some  of  the 
subsequent  holders  of  them  should  not  have  been  willing 
or  able  to  exchange  them  for  new  gold  standard  two  shilling 
dollars. 

To  the  objection  concerning  the  expense  of  recoinage  it 
may  be  replied  that  the  total  expense  of  reminting 
35,372,541  Mexican  and  British  dollars  was,  according  to 
official  figures,  $788, iSo;1  that  had  the  new  coin  sug- 
gested been  made  of  the  weight  and  fineness  of  the  French 
five-franc  piece  (25  grams  .900  fine),  the  Government  would 
have  realized  on  its  recoinage  if  the  seigniorage  were  sold  as 
bullion  at  30^.  per  standard  ounce,  a  net  profit  in  Straits 
dollars  of  about  $2,000,000  or,  in  sterling,  about  £200,000 
—  a  substantial  beginning  for  a  gold  reserve. 

To  the  objection  of  the  expense  of  establishing  a  gold 
reserve  fund  it  should  be  said  that  the  Straits  Settlements 
had  no  public  debt  in  the  autumn  of  1904^  that  the  Colony 

1  Cf.  The  Reminting  of  Dollars  in  the  Straits  Settlements,  in  [London] 
Economist,  Oct.  31,  1905,  p.  1672. 

2  The  Colony  shortly  afterwards  contracted  a  considerable  debt  through 
the  seizure,  under  the  right  of  eminent  domain,  of  the  plant  of  the  Tajong 
Pagar  Dock  Company. 


RESULTS  OF  RAISING  DOLLAR  TO   28  PENCE        443 

was  prosperous,  and  that  the  matter  of  the  floating  of  a 
loan  of  a  few  hundred  thousand  pounds  for  an  object  so 
vital  to  the  Colony's  welfare  should  have  been  considered 
as  a  mere  bagatelle. 

The  last  objection,  viz.  that  the  public  would  have  been 
averse  to  receiving  a  lighter  weight  coin,  deserves  more 
careful  consideration.  It  will  be  recalled  that  the  scheme 
of  currency  reform  recommended  by  the  Singapore  Cham- 
ber of  Commerce  in  August  1897,  which  contemplated  the 
use  of  Government  currency  notes  during  the  period  of 
recoinage,1  was  objected  to  principally  because  of  the  al- 
leged difficulty  of  inducing  the  native  holders  of  the  old 
dollars,  especially  those  of  the  Federated  Malay  States,  to 
exchange  them  for  a  paper  currency  with  which  they  were 
not  familiar.  This  difficulty,  which  appealed  strongly  to 
the  Straits  Currency  Committee,2  and  particularly  to  its 
chairman,  Sir  David  Barbour,  whose  opinion  was  based 
principally  upon  his  experience  in  India,  was  taken  less 
seriously  by  many  of  the  best  informed  business  men  liv- 
ing in  the  Colony.3  The  following  extract  from  an  official 
report  is  in  point : 

"  The  consent  of  the  home  authorities  was  obtained  in  1898 
to  the  issue  of  a  government  note  currency  for  the  Colony 
and  the  Federated  Malay  States,  and  steps  were  taken  in 
that  year  to  design  and  print  the  notes.  .  .  .  The  new 
notes  were  first  issued  on  ist  May.  [The  amount  in  circu- 
lation by  July  10  was  $1,118,000,  and  by  December  10  it 
was  $3,820,000.]  They  at  once  circulated  freely  throughout 
the  Colony  and  the  Federated  Malay  States,  and  the 
amount  issued  was  only  limited  by  the  supplies  received 
from  England." 4 

1  Cf.  S.  S.  Cur.  Com.,  Min.  Evid.  Apps.,  pp.  107-10. 

2  Cf.  S.  S.  Cur.  Com.,  Rep.,  p.  12. 

*  Cf.  Report  of  the  Singapore  Chamber  of  Commerce  for  the  Year  1905, 
pp.  v,  vi ;  and  The  Currency :  Singapore  Chamber  of  Commerce  Letter  to 
Government,  December  17,  1902,  p.  5. 

4  Report  of  the  Governor  of  the  Straits  Settlements,  1899,  pp.  6  and  7. 


444    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

These  government  notes  at  that  time,  as  since,  circulated 
widely  throughout  the  Malay  Peninsula.  '  At  the  close  of 
January  1906  their  total  circulation  amounted  to  over 
$17,000,000,  and  they  were  extremely  popular  everywhere. 
This  experience  with  government  notes  afforded  reason 
for  believing  that  little  difficulty  would  have  been  ex- 
perienced in  floating  lighter  weight  silver  coins.1  British 
administration  of  the  Straits  Settlements  and  of  the  Fed- 
erated Malay  States  had  been  honest  and  capable ;  this 
the  Chinaman,  the  Malay,  and  the  Indian  knew  well,  and 
they  all  had  the  utmost  confidence  in  the  Government. 
A  lighter  weight  coin  backed  by  the  Government  and  re- 
deemable in  gold  or  gold  exchange  on  demand  would  in  all 
probability  have  passed  quickly  into  circulation,  although 
its  introduction  might  have  encountered  temporarily  a 
slight  resistance.  This  opinion  was  substantiated  by  later 
events.2 

1  For  a  number  of  years  the  25  gram  Spanish-Filipino  peso  circulated 
throughout  the  Philippine  Islands  at  par  with  the  27.07  gram  Mexican 
dollar.     It  was  a  popular  coin  among  the  Filipinos  and  the  Chinese,  and  no 
one  seemed  to  question  its  value,  although  the  Government  never  agreed  to 
redeem  it  in  Mexican  dollars.     Cf.  supra,  pp.  249-53,  and  363. 

2  Infra,  p.  449- 


CHAPTER  V 

RISE  IN  THE  PRICE  OF   SILVER  AND  MEASURES    TAKEN 
TO  PROTECT  THE  CURRENCY 

THE  new  Straits  dollar  at  a  money  value  of  2%d.  had  a 
bullion  par  of  33^^.,  that  is,  with  standard  silver  in  Lon- 
don at  33T8<1.  per  ounce  the  dollar  would  have  contained 
2&d.  worth  of  pure  silver,  viz.  a  dollar's  worth.  On 
January  29,  1906,  when  the  2&d.  gold  par  was  announced, 
the  London  price  of  prompt  silver  was  30^^.,  giving  the 
dollar  a  margin  above  bullion  par  of  about  ten  per  cent. 
By  October  1906,  however,  silver  reached  32^^.,  which  was 
within  two  per  cent  of  bullion  par,  and  the  new  coins  were 
therefore  facing  the  danger  of  the  melting  pot.  Something 
had  to  be  done  promptly  to  protect  them.  The  Govern- 
ment might  have  met  the  difficulty  by  still  further  raising 
the  gold  par ;  since  in  fixing  the  2&d.  par  it  had  expressly 
reserved  the  right  to  raise  the  gold  par  still  higher  if  future 
advances  in  the  price  of  silver  should  make  such  a  course 
desirable. 

The  question  was  before  it,  said  the  Acting  Treasurer, 
"  whether  the  margin  should  be  provided  by  leaving  the 
size  and  fineness  of  the  dollar  as  it  was  and  raising  its  value 
to  say  30^.  or  leaving  the  value  as  it  was  fixed  in  January, 
and  debasing  the  dollar.  In  view  of  the  contracts  entered 
into  and  the  debts  incurred  on  a  dollar  fixed  at  2&d.  so  re- 
cently as  January,  and  having  regard  to  the  obligations  of 
the  Government  towards  their  own  servants,  the  Govern- 
ment had  no  hesitation  in  adopting  the  bolder  course  of 
adhering  to  the  value  fixed  and  of  reducing  the  bullion 
value  of  the  dollar." 

1  S.  S.  Fin.  Rep.  &  Stats.,  1906,  p.  u. 
445 


446    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

Secondary  Measures  for  Protecting  Currency 

Let  us  first  consider  secondary  measures  for  meeting  the 
situation,  and  then  the  principal  one,  i.e.,  recoinage. 

The  first  step,  which  was  taken  as  early  as  February 
13,  1906,  was  to  put  into  operation  again  the  order  of 
October  2,  1903  prohibiting  the  exportation  of  the  new 
dollars.1  Such  a  measure  in  an  entrepot  of  foreign  trade 
like  the  Straits  Settlements,  with  a  small  customs  service, 
would  have  been  very  difficult  to  enforce  if  the  silver  value 
of  the  dollar  should  have  risen  appreciably  above  bullion 
par,  and  was  consequently  not  relied  upon  as  an  important 
factor  in  the  solution  of  the  problem. 

The  second  step  was  to  extend  to  other  money  the  quality 
of  unlimited  legal  tender.  British  sovereigns  were  made 
unlimited  legal  tender 2  and  payable  in  the  redemption  of 
government  notes  at  the  rate  of  28^.  to  the  dollar  after 
November  23,  1906.  This  action  was  taken  "  mainly  with 
the  object  of  enabling  the  Currency  Commissioners  to  pre- 
vent any  drain  on  the  silver  reserve,"  3  of  which  the  greater 
part  was  being  remitted  to  England  for  recoinage.  Fifty- 
cent  pieces  were  made  unlimited  legal  tender,  instead  of 
legal  tender  only  to  the  amount  of  two  dollars  as  formerly.4 
Being  unlimited  legal  tender  they  could  be  paid  out  by  the 
Government  in  redemption  of  its  currency  notes.5  It  has 

1  The  Acting  Treasurer  estimated  that  the  melting  and  shipping  point 
was  i  if  per  cent  above  the  bullion  par ;  this  he  considered  sufficient  to  cover 
"cost  of  transport  (freight  and  insurance)  to  the  purchaser,  interest,  and  the 
cost  of  melting  and  refining  to  standard  bars."    S.  S.  Fin.  Rep.  &  Stats., 
1906,  pp.  lo-n. 

2  Cf .  order  of  King  in  Council  dated  October  22,  1906,  and  order  of 
Governor-General  of  the  Straits  Settlements  dated  November  20,  1906. 
Thirty-seventh  Annual  Report  of  the  Deputy  Master  and  Comptroller  of 
the  Mint,  1906,  pp.  104-105. 

8  S.  S.  Ann.  Rep.,  1906,  p.  6. 

4  An  order  to  this  effect  was  issued  by  the  Governor-General,  November  23, 
1906,  under  authority  of  an  order  of  King  in  Council  dated  October  22, 1906. 

B  Ordinance  No.  xxvi  of  1906,  amending  sec.  4,  par.  3,  of  The  Currency 
Note  Ordinance,  1899. 


RISE   IN  THE  PRICE  OF  SILVER  447 

been  observed  that  the  5o-cent  piece  is  a  very  popular 
coin  in  oriental  countries.1  It  has  a  gold  value  nearer  to 
the  standard  monetary  unit  of  most  European  countries 
than  the  dollar,  and  is  better  adapted  to  the  needs  of  poor 
countries  than  the  more  customary  oriental  unit  of  about 
twice  its  value.  Inasmuch  as  two  5o-cent  pieces  con- 
tained about  loi  per  cent  less  pure  silver  2  than  the  dollar, 
they  would  circulate  until  silver  rose  proportionately  above 
the  melting  par  of  the  dollar.  Further,  currency  notes  of 
the  denomination  of  one  dollar  were  printed  and  put  into 
circulation.  They  were -made  unlimited  legal  tender,  and 
proved  very  popular.3 

Recoinage 

The  fourth  and  most  important  step  was  that  of  re- 
coinage.  A  reduction  in  the  bullion  value  of  the  coins 
could  obviously  be  brought  about  by  (i)  a  reduction  in 
fineness  of  the  coins,  leaving  the  weight  and  size  unchanged ; 
(2)  a  reduction  in  the  weight,  leaving  the  fineness  unchanged ; 
or  (3)  a  reduction  in  both  weight  and  fineness  —  the  plan 
adopted  by  the  Philippines.4  One  of  the  chief  advantages 
of  the  first  plan  was  the  fact  that  the  size  of  the  coins  would 
be  unchanged  and  the  appearance  only  slightly  altered  and, 
as  a  consequence,  the  difficulty  of  bringing  the  new  coins 
into  ready  acceptability  by  the  public  would  be  minimized. 
Against  this  plan  was  the  obvious  objection  that  a  reduction 
in  fineness  from  .900  to  .800  reduced  the  bullion  value  of 
the  coins  by  only  n.i  per  cent,  and  afforded  too  small  a 
margin  of  safety  in  view  of  the  condition  and  prospects  of 
the  silver  market.  A  reduction  in  the  fineness  of  the  dollar 
much  below  .800  was  metallurgically  undesirable.  The 
second  or  third  plans  made  possible  a  sufficient  reduction 
in  the  bullion  value  of  the  coins  to  provide  any  margin  of 

1  Supra,  p.  361. 

2  They  contained  419  grains  of  silver  .800  fine  to  the  dollar. 

3  S.  S.  Ann.  Rep.,  1906,  p.  6.  4  Supra,  p.  361. 


448    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

safety  desired,  but  only  at  the  expense  of  endangering  the 
acceptability  of  the  coins. 

It  appears  that  the  Government  wavered  between  the 
first  and  second  plans.  In  October  1906  it  decided  merely 
to  reduce  the  fineness  of  the  dollar  from  .900  to  .800,  leaving 
the  weight  unchanged.1  But,  because  of  the  opposition  of 
the  Chinese,2  the  Government  changed  its  plan  and  decided 
upon  a  25  per  cent  reduction  in  the  weight  of  the  dollar, 
leaving  the  fineness  unchanged ;  and  a  25^  per  cent  reduc- 
tion in  the  weight  of  the  5o-cent  piece,  raising  the  fineness 
from  .800  to  .9oo.3  An  order  of  the  King  in  Council,  dated 
February  n,  1907,  authorized  the  Governor  to  fix  by 
proclamation  the  weight  of  the  new  dollar  at  312  grains, 
.900  fine,  and  that  of  the  5o-cent  piece  at  156  grains  .900 
fine.4  On  March  4,  1907  Governor  Anderson  issued  two 
proclamations5  providing  that  the  authorized  changes  in 
the  dollar  and  the  5o-cent  piece  should  go  into  effect  at  once. 
These  changes  raised  the  bullion  par  of  the  dollar  from  a 
London  price  of  silver  of  33  Ad.  to  one  of  44%d.  and  that  of 
the  half  dollar  from  3  7 Ad.  to  44^ .  The  new  bullion  par 
gives  a  gold  ratio  of  21.3  to  i,  the  same  as  that  of  the 
recoined  Philippine  peso,  a  ratio  lower  than  that  of  either 
India  or  Japan. 

1  An  order  of  the  King  in  Council  dated  October  22,  1906  provided  that 
.800  should  be  substituted  for  .900  as  the  fineness  of  the  dollars  coined  after 
such  date  as  may  be  fixed  by  the  Governor. 

2  "Both  the  Chinese  advisory  board  and  the  Chinese  chamber  of  com- 
merce were  strongly  against  any  reduction  in  the  fineness  of  the  dollar.  .  .  ." 
S.  S.  Fin.  Rep.  &  Stats.,  1906,  p.  12. 

3  The  5o-cent  piece,  being  now  a  coin  of  unlimited  legal  tender,  was  given 
the  same  fineness  as  the  dollar.     37th  Ann.  Rep.  Dep.  Master  &  Comp. 
Mint,  1906,  pp.  106-108. 

4  This  order  in  council  also  declared  that  "...  the  Governor  of  the 
Colony  may  at  any  time,  with  the  approval  of  the  Treasury  and  a  Secretary 
of  State,  issue  a  proclamation  fixing  for  the  subsidiary  coins  below  the  de- 
nomination of  fifty-cents  ...  a  new  standard  of  weight  or  milesimal  fine- 
ness or  both.  .  .  ."    Ibid.,  pp.  106-107. 

5  These  are  given  in  Report  of  the  Director  of  the  United  States  Mint, 
1907,  pp.  197-99. 


RISE  IN  THE  PRICE  OF  SILVER  449 

As  soon  as  the  recoinage  ordinance  was  issued  measures 
were  taken  for  beginning  the  work.  Large  quantities  of 
coin  on  hand  in  the  currency  note  reserve  were  shipped  at 
once  for  recoinage,  and  other  coins  were  shipped  as  rapidly 
as  they  could  conveniently  be  withdrawn  from  circulation, 
the  note  reserve  being  used  as  a  continuing  fund  to  facili- 
tate the  operation.  During  the  fiscal  year  1907  $10,767,500 
of  the  new  coins  were  received.  They  were  not  very  popu- 
lar at  first,  and  at  the  end  of  the  year  over  five  million  of 
them  were  remaining  in  the  hands  of  the  Currency  Com- 
missioners. One  dollar  notes  were  reported  to  be  taking 
the  place  to  some  extent  of  the  silver  dollars.1 

By  the  end  of  the  year  1909  the  recoinage  of  dollars  was 
practically  completed,  the  total  amount  of  new  coins  re- 
ceived being  $19,006,872,  "showing  a  surplus  of  $4,751,898 
over  the  amount  sent  for  reminting,"  2  and  yielding  a  gross 
profit  of  33^  per  cent.  The  increased  supply  of  coins  which 
would  have  resulted  from  the  recoinage  of  all  the  old  dol- 
lars would  have  been  much  larger  than  the  needs  of  the 
country;  and  accordingly  $3,000,000  were  sold  as  bullion 
in  1907  (in  addition  to  $1,000,000  of  surplus  subsidiary  sil- 
ver, including  $106,000  in  5o-cent  pieces),3  and  $12,778,213 
in  1910.  From  the  1910  sales  $9,363,070  was  realized, 
showing  a  loss  from  face  value  of  about  27  per  cent.  The 
net  profits  upon  the  recoinage  were  turned  into  the  Gold 
Standard  Reserve  Fund.4 

1  S.  S.  Fin.  Rep.  &  Stats.,  1907,  p.  7. 

2  Ibid.,  1909,  p.  6. 

3  Ibid.,  1907,  p.  8. 

4  This  fund,  which  will  be  described  later  (p.  458),  was  created  by  section 
73  of  Ordinance  No.  i  of  1906. 


2G 


CHAPTER  VI 
ADOPTION  OF  GOLD-EXCHANGE  STANDARD 

IT  has  been  noted  previously 1  that  although  there  was 
a  provision  in  the  ordinance  of  January  29,  1906  author- 
izing the  issuance  in  Singapore  of  notes  against  telegraphic 
transfers  in  favor  of  the  crown  agents  for  the  colonies  in 
London,  this  provision  referred  merely  to  exchange  in  one 
direction,  was  looked  upon  as  a  temporary  measure,  and 
that  as  late  as  the  latter  part  of  February  1906  the  Gov- 
ernment had  no  intention  of  adopting  the  principle  of  the 
gold-exchange  standard  as  a  regular  and  permanent  method 
of  maintaining  the  gold  parity  of  its  currency.  How  in 
the  Straits,  as  previously  in  India,2  the  logic  of  events  caused 
the  stone  which  the  builders  rejected  to  become  the  head  of 
the  corner  we  shall  now  see.  To  understand  this  devel- 
opment it  will  be  necessary  to  describe  briefly  the  Straits 
currency  note  system ;  for  it  was  out  of  this  system  that 
the  Straits  gold-exchange  standard  developed,  and  it  is 
chiefly  through  the  currency  note  reserve  officially  known 
as  the  Note  Guarantee  Fund  and  not,  as  might  more 
naturally  be  expected,  through  the  Gold  Standard  Re- 
serve,3 that  the  gold-exchange  standard  functions. 

The  Straits  Settlements  Currency  Notes 

The  Straits  currency  notes  of  to-day,  which  represent  by 
far  the  larger  part  of  the  circulating  medium,  are  based 
upon  the  Currency  Note  Ordinance  of  1899  and  its  nu- 

1  Supra,  pp.  416-20. 

2  Supra,  pp.  100-104,  117—18, 122  and  127-29. 

3  Infra,  p.  458. 

450 


ADOPTION  OF  GOLD-EXCHANGE  STANDARD         451 

merous  subsequent  amendments.1  This  Ordinance  author- 
ized the  issuance  of  currency  notes  which  should  "be  a 
promise  on  the  part  of  the  Government  of  the  Straits  Settle- 
ments to  pay  the  bearer  on  demand  the  amount  named 
therein,"  and  provided  that  the  amount  required  for  such 
payment  should  be  a  charge  on  the  moneys  and  securities 
in  the  hands  of  the  Currency  Note  Commissioners.  These 
Commissioners  who  were  to  constitute  a  board  for  the 
administration  of  the  ordinance  consisted  of  "the  persons 
for  the  time  being  lawfully  discharging  the  duties  of  Co- 
lonial Secretary  and  Treasurer  and  of  one  other  person 
nominated  by  the  Governor."  The  notes  were  made  un- 
limited legal  tender.2  For  the  maintenance  of  their  parity 
with  the  silver  dollar  a  Note  Guarantee  Fund  was  created 
to  be  held  in  the  Colony  by  the  Commissioners.  This 
Fund  was  divided  in  two  parts:  a  coin  portion  which 
should  be  fixed  at  not  less  than  two  thirds  of  the  Fund,3 
and  an  invested  portion  which  should  consist  entirely  (or 
chiefly)  of  British  and  colonial  government  securities.  If 
the  coin  in  the  Fund  should  at  any  time  fall  below  the  fixed 
proportion  established  by  the  ordinance,  the  Commissioners 
were  required  to  make  up  the  deficiency  by  the  sale  of 
securities  from  the  invested  portion.4  Part  of  the  income 
from  the  securities  was  to  be  carried  to  a  depreciation  fund 
until  such  a  time  as  any  depreciation  that  might  have  oc- 

1  Amendments  Nos.  xiii  of  1903,  iv  of  1904,  iii  of  1905,  i,  v,  xxiii,  and  xxvi 
of  1906,  and  xxvii  of  1908. 

2  They  were  not  legal  tender  for  payments  by  the  Commissioners  at  their 
office,  nor  for  payments  by  banks  in  the  redemption  of  their  bank  notes. 
The  law  provided  that  one  dollar  notes  should  be  legal  tender  only  up  to 
ten  dollars.     One  dollar  notes,  however,  were  not  issued  until  the  latter  part 
of  1906  and  then  they  were  made  unlimited  legal  tender.     Supra,  p.  447. 

8  Under  certain  conditions,  the  coin  portion  might  be  reduced  from  two 
thirds  of  the  Fund  to  one  half,  by  the  Governor,  with  the  consent  of  the 
Secretary  of  State  in  London. 

4  There  were  some  later  qualifications  to  this  rule,  the  chief  of  which  for 
our  purposes  was  a  waiving  of  the  rule  in  the  case  of  a  deficiency  in  the  coin 
portion  resulting  from  the  temporary  withdrawal  of  coin  for  purpose  of  re- 
coinage.  Cf.  Ordinance  No.  xiii  of  July  3,  1903. 


452    THE  STRAITS  SETTLEMENTS  CURRENCY  REFORM 

curred  in  the  securities  should  be  made  good  and  until  a 
fund  equal  to  at  least  10  per  cent  of  the  invested  portion  of 
the  Guarantee  Fund  should  be  accumulated. 


Decline  in  Dollar  Value  of  Note  Guarantee  Fund 

The  currency  notes  proved  to  be  very  popular,  and  by 
the  year  1903,  the  year  in  which  the  currency  reform  was 
inaugurated,  the  average  monthly  circulation  was  over 
fifteen  million  dollars.  With  the  raising  of  the  Straits  dollar 
to  a  28^.  basis  there  was  obviously  a  proportionate  shrink- 
age in  the  dollar  value  of  the  securities  in  the  Guarantee 
Fund,  including  also  those  in  the  depreciation  fund.  The 
assets  held  by  the  Currency  Commissioners  were  accord- 
ingly reduced,  while  the  liabilities  in  the  form  of  notes  in 
circulation  were  not  affected.  For  November  1906  the 
Commissioners  reported  the  value  of  the  securities  in  the 
Note  Guarantee  Fund  "  calculated  at  the  latest  known 
market  rates  of  November  1906"  at  $8,011,066,  and  the 
original  cost  of  these  securities  at  $9,948,816,  showing  a 
difference  of  $1,937,750  or  igj-  per  cent.  The  November 
1906  value  of  the  securities  in  the  depreciation  fund  was 
$267,301,  and  their  original  cost  was  $333,539,  a  differ- 
ence of  $66,238  or  approximately  20  per  cent.1  While  this 
depreciation  was  due  chiefly  to  the  raising  of  the  ster- 
ling value  of  the  dollar,  a  28^.  dollar  being  nearly  17  per 
cent  more  valuable  in  terms  of  gold  than  a  25.  dollar,  for 
example,  it  was  due  to  a  small  extent  also  to  a  decline  in 
the  average  sterling  value  of  the  securities  since  the  date  of 
their  purchase. 

By  using  the  depreciation  fund,  making  substantial  con- 
tributions from  general  revenues,2  and  taking  all  the  cur- 
rent net  income  from  the  securities,3  the  Government  suc- 

1  S.  S.  Fin.  Rep.  &  Stats.,  1906,  last  page. 

2  Ibid.,  p.  6. 

3  Ordinance  No.  v  of  1906. 


ADOPTION  OF  GOLD-EXCHANGE  STANDARD         453 

ceeded  by  June  1906  in  reducing  the  deficiency  in  the  in- 
vested portion  to  $757,697,  and  by  June  1910  to  $443, IO4.1 

Beginnings  of  Gold-Exchange  Standard 

We  are  now  in  a  position  to  consider  the  use  of  this  Note 
Guarantee  Fund  in  connection  with  the  development  of 
the  gold-exchange  standard.  As  previously  noted,2  the  or- 
dinance and  order  in  council  of  January  29,  1906  that  fixed 
the  gold  value  of  the  Straits  dollar  at  2%d.  authorized  the 
Currency  Commissioners  to  give  notes  in  exchange  for  gold 
at  Singapore  at  the  rate  of  28^.  and  to  accept  tenders  for 
the  issue  of  notes  in  Singapore  against  telegraphic  transfers 
in  favor  of  the  crown  agents  for  the  colonies  in  London  3 
provided  that  such  tenders  should  provide  sufficient  margin 
above  the  2%d.  rate  to  cover  all  charges  including  interest 
which  might  be  incurred  in  remitting  this  gold  to  Singapore. 
The  gold  so  received  both  in  London  and  in  Singapore  was 
to  go  into  the  Note  Guarantee  Fund  to  be  used  by  the 
Commissioners  for  the  coinage  of  more  dollars,4  for  the 
purchase  of  securities  for  the  investment  portion  of  the 
fund,  and  ultimately  for  redemption  purposes.5 

"No  advantage  was  taken  by  the  banks  of  the  facilities 
afforded  them  by  the  new  ordinance  to  obtain  a  supply  of 
local  currency  by  sale  of  telegraphic  transfers  to  Govern- 
ment, and  gold  was  not  tendered  to  the  Currency  Commis- 

1  S.  S.  Fin.  Rep.  &  Stats.,  1906,  p.  6 ;  and  ibid.,  1910,  p.  5. 

2  Supra,  pp.  416-17. 

8  By  Ordinance  No.  iv  of  March  18,  1904  and  again  by  Ordinance  No.  iii 
of  March  17,  1905,  both  promulgated  before  the  Straits  currency  had  at- 
tained a  gold  basis,  the  Currency  Commissioners  in  Singapore  were  author- 
ized to  issue  notes  in  exchange  for  gold  deposited  in  London  or  with  the  Com- 
missioners at  Singapore,  at  rates  to  be  officially  determined.  The  writer 
has  seen  no  evidence  of  any  such  gold  deposits  having  been  made  prior 
to  March  1906. 

4  The  profits  on  the  coinage  were  to  be  turned  over  to  a  separate  Gold 
Standard  Fund  created  by  Ordinance  No.  iii  of  March  17,  1905. 

5  Supra,  p.  419. 


454    THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 

sioners  in  any  considerable  quantity  until  April,  although  a 
large  amount  was  available  in  the  Colony."  1 

Gold  was  first  tendered  to  the  Commissioners  for  notes 
about  the  end  of  March,  and  by  the  end  of  August  the 
amount  in  possession  of  the  Commissioners  was  £954,730^ 
The  Government,  however,  had  little  need  of  a  large  sup- 
ply of  gold  coin  in  the  vaults  of  the  Currency  Commissioners 
in  Singapore.  It  had  not  yet  committed  itself  to  redeem 
its  currency  in  gold.  The  invested  portion  of  its  Note 
Guarantee  Fund  needed  to  be  greatly  increased  in  view  of 
the  great  increase  in  the  note  circulation  from  $17,215,280 
at  the  end  of  March  1906  to  $24,786,105  at  the  end  of 
August.  Furthermore,  in  view  of  the  deficiency  in  this 
Fund  arising  from  the  raising  of  the  dollar  to  28^.,  it  was 
but  natural  that  the  Government  should  want  to  buy  the 
securities  promptly  so  as  to  yield  the  largest  possible  in- 
come. For  the  purchase  of  securities,  however,  the  Fund 
needed  to  be  in  London,  not  in  Singapore.  Such  a  heavy 
demand  for  notes,  moreover,  was  liable  soon  to  lead  to 
the  necessity  of  purchasing  more  silver  for  coinage,  and  for 
this  purpose  likewise  the  funds  would  not  be  needed  in 
Singapore  but  in  London.  The  Commissioners  accordingly 
shipped  £210,000  to  London  for  investment,  and  re- 
mitted to  London  through  one  of  the  banks  approximately 
the  same  amount,  £100,000  of  which  was  invested  and  the 
balance  of  which  was  drawn  against  for  the  redemption  of 
notes  in  Singapore.  It  was  becoming  more  and  more  ob- 
vious that  it  was  a  cumbersome  and  needlessly  expensive 
procedure  to  encourage  the  payment  of  gold  coin  to  the 

1  S.  S.  Fin.  Rep.  &  Stats.,  1906,  p.  9. 

2  Ibid. 

The  first  appearance  of  gold  in  the  monthly  statements  of  the  Commis- 
sioners is  in  that  of  March  31,  1906,  the  amount  being  £1700.  For  the  last 
day  of  subsequent  months  of  1906  the  gold  held  was  as  follows:  April, 
£158,221;  May,  £482,412;  June,  £767,354;  July,  £893,039;  August, 
£9S4,73o;  September,  £744,730;  October,  £623,511;  November,  £453,334; 
December,  £127,169. 


ADOPTION  OF  GOLD-EXCHANGE  STANDARD         455 

Commissioners  in  Singapore  in  exchange  for  notes,  requir- 
ing the  shipment  of  gold  to  the  Straits,  only  to  have  it 
shipped  back  to  London  again  at  the  Colony's  expense. 

The  genii  of  the  gold-exchange  standard  seemed  deter- 
mined to  make  a  thoroughgoing  demonstration  of  the 
advantages  of  their  system;  for  the  gold  in  the  Note 
Guarantee  Fund  and  the  local  currency  in  the  banks  and 
in  circulation  having  reached  their  maxima  in  August,  the 
tide  began  to  turn  in  the  opposite  direction,  and  exchange 
rates  declined  to  a  lower  level.  The  Government,  antici- 
pating the  danger  of  an  undue  depreciation  in  the  dollar, 
which  had  only  a  few  months  before  reached  its  2&d.  par, 
passed  an  ordinance  in  August  authorizing  the  Commis- 
sioners to  issue  gold  in  exchange  for  notes,  and  to  sell  tele- 
graphic transfers  on  the  crown  agents  in  London  at  a 
margin  sufficiently  below  the  2&d.  par  to  cover  all  charges, 
including  interest  incurred  in  remitting  gold  from  Singa- 
pore to  London.1 

"  During  the  latter  part  of  November,  and  in  December, 
there  arose  a  large  demand  for  gold  in  India  and  the  banks 
drew  on  the  gold  in  the  possession  of  the  Currency  Commis- 
sioners for  the  purpose  of  shipment  to  India.  Altogether 
£407,162  were  taken  out  of  the  currency  reserve  for  export 
to  that  country.  As  reminting  operations  were  in  progress 
and  the  Straits  dollars  in  the  currency  note  reserve  were 
required  for  shipment  to  England,  the  Currency  Commis- 
sioners refrained  [for  a  time]  from  exercising  the  discretion 
they  possessed  under  the  Ordinance  to  give  either  gold  or 
silver  in  exchange  for  notes  tendered."  2 

But  when  in  December  the  limit  of  £125,000  of  gold  in 
the  Note  Guarantee  Fund  was  reached,  the  Commissioners 
refused  further  to  issue  sovereigns  in  exchange  for  notes. 
Special  means,  however,  were  taken  further  to  contract 
the  currency  so  as  to  relieve  the  redundancy.3 

1  Ordinance  No.  xxiii  of  1906.     Cf.  also  infra,  p.  459. 

a  S.  S.  Fin.  Rep.  &  Stats.,  1906,  p.  9.  3  Ibid.,  pp.  o-io, 


456    THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 

Through  Ordinances  i  and  xxiii  of  1906  the  Straits  Gov- 
ernment had  now  provided  means  of  selling  drafts  on 
reserves  belonging  to  the  Note  Guarantee  Fund,  both  in 
London  on  Singapore  and  in  Singapore  on  London,  and 
drafts  in  both  directions  were  sold  during  the  year.  In  this 
way  the  Government  had  introduced  the  essentials  of  the 
gold-exchange  standard.  The  Acting  Treasurer  in  his  re- 
port dated  June  18,  1907  gave  the  following  statement  of 
the  Government's  intentions : 

"The  factors  which  determine  the  limits  of  the  variations 
of  the  sterling  value  of  the  dollar  are  the  cost  to  Government 
of  bringing  out  gold  to  Singapore  and  the  cost  of  sending 
gold  to  the  central  market  of  the  world  viz. :  —  London. 
The  intention  of  the  Government  is,  in  the  case  of  any 
dearth  of  currency  and  in  the  event  of  gold  not  being  avail- 
able in  the  Colony,  to  issue  notes  by  buying  telegraphic 
transfers  payable  to  the  crown  agents  in  London  and,  in 
the  case  of  any  excess  of  currency  and  in  the  event  of  the 
currency  gold  reserve  being  exhausted,  to  draw  in  notes 
by  selling  telegraphic  transfers  payable  by  the  crown  agents 
in  London.  These  limits  have  been  fixed  at  283^.  (buy- 
ing) and  2ji^d.  (selling)  and  they  provide  a  sufficiently 
liberal  margin  for  all  contingencies  including  freight,  in- 
surance, packing,  shipping  charges  and  interest.  They 
will,  therefore,  mark  the  extreme  high  water  and  the  ex- 
treme low  water  limit  to  the  sterling  value  of  the  dollar 
and  the  Government  may  be  expected  to  actively  inter- 
vene whenever  the  dollar  is  within  measurable  distance  of 
either  of  these  limits."  l 

This  is  a  clear  declaration  of  the  Government's  inten- 
tion to  apply  the  principle  of  the  gold-exchange  standard 
whenever  conditions  in  the  Colony  were  not  favorable 
for  the  Currency  Note  Commissioners  to  pay  out  gold 
coin  in  exchange  for  notes  and  notes  in  exchange  for  gold 
coin. 

1  S.  S.  Fin.  Rep.  &  Stats.,  1906,  p.  10, 


ADOPTION  OF   GOLD-EXCHANGE  STANDARD         457 

On  December  2,  1908  there  were  passed  some  important 
amendments  to  the  Currency  Note  Ordinance  of  1899, 
which  have  a  bearing  upon  the  functioning  of  the  Straits 
gold-exchange  standard.1  These  amendments  provided 
that  "the  proportion  of  gold  to  silver  in  the  coin  portion 
of  the  [Currency  Note  Guarantee]  Fund  shall  as  soon  as 
practicable  be  raised  to  two  of  gold  to  one  of  silver,"  and 
that  a  part  of  the  coin  portion  of  the  Fund  as  well  as  the 
invested  portion  might  be  kept  with  the  crown  agents  for 
the  colonies  in  London.  It  reaffirmed  the  provisions  of 
the  Currency  Note  Amendment  Ordinances  of  1906?  with 
some  slight  changes,  concerning  the  sale  of  exchange  by 
the  Commissioners  in  Singapore  upon  that  part  of  the 
Note  Guarantee  Fund  which  was  held  by  the  crown  agents 
for  the  colonies  in  London.  Straits  dollars,  5o-cent  pieces 
(which  were  now  unlimited  legal  tender3),  and  currency 
notes  were  made  receivable  by  the  Commissioners  in 
payment  for  such  drafts,  and  the  premiums  were  to  be 
based,  as  previously,  upon  the  shipping  expenses  for  sov- 
ereigns between  Singapore  and  London.  The  money  re- 
ceived in  Singapore  in  payment  for  the  drafts  was  to  be 
withdrawn  from  circulation  so  as  to  contract  the  currency, 
and  was  to  be  held  in  the  custody  of  the  Commissioners. 
On  the  other  hand,  dollars,  5o-cent  pieces,  and  notes  were 
made  payable  in  the  Colony  in  exchange  for  sovereigns  paid 
into  the  Note  Guarantee  Fund  with  the  crown  agents  for 
the  colonies  in  London,4  a  sufficient  premium  being  charged 
to  cover  the  cost  of  shipping  sovereigns  from  London. 

1  Cf.  Ordinance  No.  xxvii  of  1908. 

2  Supra,  pp.  416-17. 

3  Supra,  pp.  446-47. 

4  A  new  feature  of  this  purchase  of  sterling  exchange  was  introduced  by 
the  Currency  Note  Commissioners,  September  15,  1909  (under  authority  of 
ordinance  No.  xxvii  of  1908).     Under  it  the  Commissioners  are  prepared  to 
purchase  sovereigns  in  transit  from  Australia  to  England,  payment  being 
made  "at  28d.  seventeen  days  after  the  departure  from  Freeman  tie  of  the 
vessel  in  which  the  sovereigns  are  shipped  on  receipt  of  telegraphic  instruc- 
tions from  the  crown  agents."    S.  S.  Fin.  Rep.  &  Stats.,  1909,  p.  6. 


458    THE  STRAITS   SETTLEMENTS   CURRENCY  REFORM 

The  premiums  realized  on  this  exchange,  as  likewise  the 
net  profits  realized  on  the  recoinage,  were  to  accrue  to  the 
Gold  Standard  Reserve.1  This  Reserve,  which  is  an  in- 
vested fund,  has  little  direct  importance  to  the  functioning 
of  the  gold-exchange  standard.  It  serves  chiefly  as  a  sort 
of  secondary  reserve  and  guarantee  fund  for  the  mainte- 
nance of  the  gold  parity.  As  previously  observed,  it  is 
through  the  Note  Guarantee  Fund  that  the  gold-exchange 
standard  chiefly2  functions. 

How  the  Gold-Exchange  Standard  has  Worked 

The  Straits  Settlements  differ  from  the  Philippines3  in 
experiencing  normally  a  substantial  variation  in  exchange 
rates  during  a  calendar  year.4  In  the  Straits,  therefore, 
the  gold-exchange  system  normally  functions  in  both  di- 
rections, although  it  happens  in  some  years,  as  for  ex- 
ample in  1910,  that  exchange  rules  strongly  in  one  direc- 
tion and  that  all  the  drafts  sold  by  the  Currency  Note 
Commissioners  are  in  that  direction. 

Nearly  every  year  gold  coin  is  received  by  the  Currency 
Note  Commissioners  in  the  Colony  in  exchange  for  notes 
given  out;  and  likewise  gold  is  given  out  in  exchange  for 
notes  tendered.  None  the  less  by  far  the  larger  part  of 
the  gold  portion  of  the  Note  Guarantee  Fund  is  kept  with 
the  crown  agents  for  the  colonies  in  London,  and  this 

1  Supra,  p.  449. 

2  There  is  an  emergency  provision  in  the  Ordinance  of  1908  that :  "Sub- 
ject to  the  sanction  of  the  Governor  it  shall  be  lawful  for  the  Commissioners, 
whenever  it  maybe  deemed  necessary,  to  make  use  of  any  portion  of  the  Gold 
Standard  Reserve  in  the  payment  of  currency  notes." 

For  a  similar  situation  in  India,  see  supra,  pp.  100-108,  117—120,  and 
135-38. 

3  Cf.  supra,  p.  368. 

4  The  range  of  demand  rates  for  the  years  1908-10  were : 

Year  High  Low 

•  5.   d.  s.  d. 

1908  24  2  3f 

1909  2  4r8ff  2  3l 

1910  2  4i\  2  4| 


ADOPTION  OF  GOLD-EXCHANGE  STANDARD 


459 


proportion  appears  to  be  a  growing  one.  The  figures  for 
the  gold  received  and  paid  out  since  1907  so  far  as  at 
present  available  are  as  follows : 


YEAR 

GOLD  RECEIVED 

GOLD  PAID  OUT 

YEAR 

GOLD  RECEIVED 

GOLD  PAID  OUT 

£ 

£ 

£ 

£ 

1907 
1908 
1909 

262,834 
112,180 

218,874 
179,900 
95,970 

1910 
1911 
1912 

307,090 
556,312 
608,505 

43,300 
703,998 
698,545 

S.  S.  Fin.  Rep.  &  Stats.,  passim. 

The  chief  reason  why  such  substantial  quantities  of  gold 
are  tendered  for  notes  to  the  Commissioners  in  Singapore  is 
probably  the  fact  that  the  Government's  "import  point " 
for  the  sale  of  drafts  on  the  Fund  in  Singapore,  i.e.,  28 A d., 
is  under  normal  circumstances  too  high.  Inasmuch  as  the 
banks  have  more  than  once  been  able  to  lay  down  gold 
in  Singapore  from  London  at  2&%d.,  they  naturally  at  such 
times  choose  that  method  of  obtaining  currency  in  the 
Straits  to  the  method  of  purchasing  drafts.  Under  these 
conditions  it  would  seem  wise  for  the  Straits  Government 
to  reduce  their  normal  rate  for  the  sale  in  London  of 
dollar  drafts  on  the  Fund  in  Singapore  to  2&%d. 

In  a  colony  like  the  Straits  Settlements,  well  supplied 
with  a  sound  government-note  currency  of  convenient 
denominations  in  which  the  public  have  full  confidence, 
with  an  ample  supply  of  silver  coins,  and  with  good  bank- 
ing facilities,  there  is  little  justification  for  trying  to  keep 
gold  coin  in  circulation.  For  purposes  of  maintaining  the 
parity  of  the  fiduciary  unit  with  gold,  and  of  regulating 
the  currency  supply  to  trade  demands,  the  sale  of  drafts 
under  the  system  of  the  gold-exchange  standard  is  more 
efficient  and  less  expensive.  A  still  greater  dependence 
upon  this  system  in  the  Straits,  rather  than  upon  the  direct 
use  of  gold  in  the  Colony,  would  seem  desirable.  At  present 
the  tendency  seems  to  be  in  that  direction. 


460    THE  STRAITS  SETTLEMENTS   CURRENCY  REFORM 


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APPENDIX  B 

PRINCIPAL  REFERENCES  CITED 

CHALMERS,  ROBERT.  A  History  of  Currency  in  the  British  Colonies. 
London:  Eyre  and  Spottiswoode,  1893. 

Colonial  Office  List.     Annual.    London:  Waterlow  &  Sons,  Ltd. 

Commissioners  of  Currency  for  the  Straits  Settlements.  Monthly 
Reports.  Singapore:  Government. 

Commission  on  International  Exchange.  Report  on  the  Introduction 
of  the  Gold-Exchange  Standard  into  China,  the  Philippines, 
Panama,  and  Other  Silver  Standard  Countries,  etc.  Washington: 
Superintendent  of  Documents,  1904. 

Report  on  Stability  of  International  Exchange,  etc.  Wash- 
ington: Superintendent  of  Documents,  1903. 

Deputy  Master  and  Comptroller  of  the  Mint.  Annual  Reports. 
London:  British  Blue  Book. 

Director  of  the  Mint.  Annual  Reports.  Washington:  Superin- 
tendent of  Documents. 

Economist,  The  London.    Weekly.    Passim. 

ERASER  &  COMPANY.  Singapore  Rates  of  Exchange.  Published  at 
Intervals  for  Outgoing  Home  Mails.  Bound  Annually.  Singa- 
pore: Eraser  &  Company,  Brokers. 

HUTTENBACH,  AUGUST.  The  Silver  Standard  and  the  Straits  Cur- 
rency Question.  Singapore:  Eraser  &  Neave,  Ltd.,  1903. 

KEMMERER,  E.  W.  A  Gold  Standard  for  the  Straits  Settlements,  I 
and  II.  Political  Science  Quarterly,  XIX,  1904,  pp.  639-649; 
and  XXI,  1906,  pp.  663-698. 

.    Second  Annual  Report  of  the  Chief  of  the  Division  of  the 

Currency   for   the    Philippine   Islands.     Manila:    Government 
Printing  Office,  1906. 

.  The  Recent  Rise  in  the  Price  of  Silver  and  Some  of  its  Mone- 
tary Consequences.  Quarterly  Journal  of  Economics,  XXVI, 
1912,  pp.  254-261. 

Singapore  Chamber  of  Commerce.  Letter  (with  Appendices)  to 
Government,  Dated  December  1902.  The  Currency.  Singapore: 
Eraser  &  Neave,  Ltd.,  1902. 

46? 


APPENDIX  B  463 

— .  Annual  Reports,  1903-06.  Singapore:  Fraser  &  Neave, 
Ltd. 

Singapore  Free  Press.     Daily  and  Weekly  Editions.    Passim. 

Statistical  Abstract  for  the  Several  British  Colonies  and  Protectorates. 
Annual.  London:  British  Blue  Book. 

Statistical  Tables  Relating  to  British  Colonies,  Possessions  and  Pro- 
tectorates. Annual.  London:  British  Blue  Book. 

Straits  Settlements.  Annual  Reports;  also  Annual  Reports  of  the 
Federated  Malay  States.  London:  British  Blue  Books. 

Straits  Settlements  Currency  Committee.  Report,  Minutes  of  Evi- 
dence and  Appendices,  1903.  London:  British  Blue  Book. 

Straits  Settlements.  Financial  Reports  and  Statements.  Annual. 
Singapore:  Government. 

Times,  The  London,  Financial  and  Commercial  Supplement. 
Passim. 

See  also  Bibliographical  References  on  Indian  Currency  Reform,  pp. 
149-52. 


PART  V 
THE  MEXICAN   CURRENCY    REFORM,    1903-08 


CHAPTER  I 

INTRODUCTION 

MEXICO'S  chief  title  to  fame  in  the  economic  world  in 
modern  times  has  consisted  in  its  silver  production  and  its 
silver  dollar.  Until  very  recently  Mexico  has  been  the 
world's  greatest  producer  of  silver;  while  for  the  period 
under  study,  1903-08,  it  was  a  very  close  second  to  the 
United  States.  Prior  to  the  opening  of  silver  mines  in 
the  United  States  about  a  half  century  ago  nearly  all  the 
silver  used  in  the  civilized  world  had  for  generations  come 
from  Mexico  and  Spanish  America.  From  these  regions 
it  is  estimated  that  there  came  more  than  four  fifths  of  the 
world's  production  for  the  period  1493-1850;  while  from 
the  latter  date  to  1902  a  careful  estimate  assigns  to  Mexico 
alone  107  million  kilograms  out  of  a  total  world  production 
of  284  million.1 

Only  an  insignificant  part  of  Mexico's  silver  production 
has  been  retained  at  home  —  in  recent  years  approximately 
5  per  cent 2 — the  rest  being  scattered  over  the  entire  world, 
civilized  and  semi-civilized.  Regardless  of  its  subsequent 
history,  this  silver,  originally  at  least,  went  out  in  the  form 
of  Mexico's  world-famed  coin,  the  Spanish  "piece  of  eight"3 
and  its  successor,  under  Mexican  independence,  the  Mexican 

1  This  is  the  estimate  of  A.  Piatt  Andrew,  based  upon  the  data  collected 
by  Soetbeer,  Lexis,  and  the  directors  of  the  mint  in  France  and  the  United 
States.     Andrew,  The  End  of  the  Mexican  Dollar,  in  Quarterly  Journal  of 
Economics,  XVTII,  1904,  pp.  324-25. 

2  Cf.  Werner  Hegemann,  Mexicos  Ubergang  zur  Goldwahrung,  p.  21 ; 
also  Jaime  Gurza,  Apuntos  sobre  la  Cuestion  de  la  Plata  en  Mexico,  in 
Comision  Monetaria,  Mexico,  Datos  para  el  Estudio  de  la  Cuestion  Mone- 
taria,  pp.  57-63. 

3  Since  1893-94  the  exportation  of  uncoined  silver  has  exceeded  that  of 
coined  silver.     For  table  of  annual  percentages  see  Gurza,  op.  cit.,  p.  60. 

467 


468         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

dollar  or  peso,1  a  coin  which  still  retains  practically  the  legal 
weight  and  fineness  2  assigned  in  1772  to  the  earlier  Spanish 
dollar.3  This  coin  is  probably  the  most  famous  one  in 
modern  history,  the  only  one  which  at  all  challenges  it  being 
the  Maria  Theresa  dollar.  Spanish  milled  dollars,  as  is 
well  known,  were  by  far  the  most  important  coins  in  the 
British  colonies  in  America  before  the  Revolution  —  the 
coins,  according  to  Thomas  Jefferson,  "most  familiar  of  all 
to  the  minds  of  the  people."  4 

These  coins  circulated  also  in  Florida,  Cuba,  San  Do- 
mingo, Porto  Rico,  and  the  other  Spanish  Antilles.  Even 
before  1600,  it  is  said,  they  circulated  in  the  Philippine 
Islands,  and  had  become  familiar  at  such  Chinese  ports 
as  Canton,  Ningpo,  and  Amoy.  Students  of  American 
monetary  history  know  that  the  United  States  silver  dollar 
in  the  Mint  Act  of  1792  was  modeled  after  the  Spanish 
milled  dollar,  and  that  the  average  silver  content  of  that 

1  Throughout  this  paper  the  word  peso  will  usually  be  employed  for  the 
Mexican  coin  in  preference  to  dollar  and  will  be  designated  by  the  symbol 
"P",  in  order  to  distinguish  it  from  the  United  States  dollar,  which  is  fre- 
quently mentioned  and  for  which  the  usual  symbol  is  used.     Centavo  will  be 
used  to  refer  to  the  hundredth  part  of  the  peso,  while  cent  will  be  used  for 
the  hundredth  part  of  the  dollar.     For  the  sake  of  clearness  the  above  terms 
and  symbols  will  be  substituted  in  quotations,  except  where  the  context 
clearly  makes  such  substitution  unnecessary. 

2  The  Mexican  peso  of  the  period  under  study  contained  a  legal  gross 
weight  of  27.073  grams  (417.8  grains),  and  a  legal   millesimal  fineness  of 
.90278,  giving  it  a  fine  silver  content  of  376.96  grains,  i.e.,  78.53  per  cent  of  an 
ounce  Troy  or  101.8  per  cent  of  the  fine  silver  content  of  a  United  States 
silver  dollar. 

3  Despite  the  frequent  debasement  of  the  coins  of  other  nations,  the 
Spanish-Mexican  peso  has  been  subject  to  few  important  changes  during 
its  history.    No  coin  of  long  history  better  deserves  the  name  "an  honest 
dollar."     According  to  William  Graham  Sumner,  from  1497  to  our  own  time 
this  peso  as  a  world  coin  was  only  reduced  by  about  5.9  per  cent  in  its  pure 
silver  content.     Sumner,  The  Spanish  Dollar  and  the  Colonial  Shilling,  in 
American  Historical  Review,  III,  1898,  p.  617.     Cf.  also  Robert  Chalmers, 
Colonial  Currency,  pp.  392-93. 

4  Cf .  Jefferson,  Notes  on  the  Establishment  of  a  Money  Unit  and  of  a 
Coinage  for  the  United  States,  in  Report  of  the  International  Monetary 
Conference  Held  in  Paris,  1878,  pp.  437-43. 


INTRODUCTION  469 

Spanish  coin  as  estimated  by  Alexander  Hamilton  in  his 
Report  on  the  Mint  was  one  of  the  important  factors— 
probably  the  most  important  one  —  determining  the  size  of 
the  unit  of  value  we  have  had  ever  since.  The  Mexican 
peso  or  its  predecessor  was  the  best  known  silver  coin  in 
the  United  States  during  the  greater  part  of  the  first  half  of 
the  nineteenth  century,  and  did  not  cease  permanently  to 
be  unlimited  legal  tender  in  the  United  States  until  1857. 
During  the  greater  part  of  the  last  century  this  coin  had 
an  extended  circulation  in  the  West  Indies  and  South 
America,  and  until  recently  has  been  the  coin  of  com- 
merce par  excellence  in  the  Orient.1  It  still  has  a  large 
circulation  in  China.  In  very  recent  times  it  has  served 
as  a  model,  so  far  as  weight  and  fine  silver  content  are 
concerned,  for  the  ill-fated  Hongkong  dollar,  the  Japanese 
yen,  the  British  dollar,  the  Philippine  peso  of  1903,  the 
French  piastre  de  commerce,  and  the  Straits  Settlements 
dollar  of  1903. 

Detailed  consideration  of  this  interesting  history,  how- 
ever, is  beyond  the  scope  of  the  present  study.  The  above 
facts  will  be  sufficient  to  furnish  the  necessary  background 
and  to  enable  the  reader  better  to  understand  some  of  the 
features  of  the  recent  reform,  such  as  the  strong  popular 
prejudice  in  Mexico  in  favor  of  the  old  peso,  the  reluctance 
to  discontinue  its  coinage  or  change  its  design,  and  the 
alleged  difficulty  of  prohibiting  the  reimportation  of  these 
pesos  and  controlling  their  supply  in  Mexico  in  case  they 
should  be  given  a  monopoly  value  in  the  home  circulation. 

This  preliminary  part  of  our  discussion  may  be  fitly 
concluded  by  an  extract  from  an  address  by  Mexico's  able 
finance  minister,  Jose  Yves  Limantour : 

"  Our  country  finds  itself  in  an  exceptional  position,  in 
part,  because  from  its  mines  are  extracted  one  third  of  the 

1  Cf.  J.  D.  Casasus,  El  Peso  Mexicano  y  sus  Rivales  en  los  Mercados  del 
Extreme  Oriente.  Published  in  Com.  Mon.  Mex.,  Datos,  etc.,  pp.  1-18. 


470        THE  MEXICAN  CURRENCY  REFORM,   1903-08 

world's  total  production  of  silver ;  in  part,  because  this  in- 
dustry, second  only  to  agriculture,  is  the  most  important 
national  industry ;  and  in  part,  because  silver,  in  addition 
to  the  role  which  as  merchandise  it  plays  in  our  foreign 
commerce,  serves  as  our  domestic  monetary  standard  and 
as  the  measure  of  all  other  values ;  and  finally,  because  that 
element  of  our  wealth  represents  two  fifths  of  our  exports, 
and  is  therefore  the  prime  factor  in  the  payment  of  the 
articles  which  we  purchase  abroad  and  in  the  settlement  of 
our  trade  balance."  1 

1  Cf .  Comision  Monetaria,  Mexico,  Actas  de  las  Juntas  Generates  y  Docu- 
mentos  a  ellas  Anexos,  p.  10.  Hereafter  cited  as  Com.  Mon.  Mex.,  Actas, 
etc. 


CHAPTER  II 

ECONOMIC  CONDITIONS  IN   MEXICO   IMMEDIATELY   PRE- 
CEDING THE  REFORM  OF  1903-08 

PRIOR  to  the  reform  of  1903-08  the  currency  system  of 
Mexico  was  based  upon  the  law  of  November  27,  1867, 
which  had  introduced  the  decimal  monetary  system. 
The  preamble  of  this  law  stated  its  object  to  be  the  estab- 
lishment of  a  uniform  system  of  currency  without  making 
any  essential  modifications  in  the  value  of  the  monetary 
unit.1  The  law  continued  the  Mexican  peso  at  its  pre- 
vious weight  and  fineness  as  the  unit  of  value.2  The  peso, 

1  Cf.  United  States  Special  Consular  Reports,  XIII,  Money  and  Prices 
in  Foreign  Countries,  in  House  Docs.,  54th  Cong.,  2d  Sess.,  1896-97, 
XXXII,  pp.  IH-I2. 

2  There  were  certain  government  charges  in  connection  with  the  bringing 
of  silver  to  the  mints  and  having  it  coined,  some  of  which  explained  in  part 
the  small  divergences  which  nearly  always  existed  between  the  money  value 
of  the  peso  and  the  value  of  its  fine  silver  content.    These  charges  were 
summarized  as  follows  by  United  States  Minister  Ransom  in  his  report  of 
September  26,  1896 : 

"First.    A  tax  of  2  per  cent  (erroneously  called  the  coinage  tax). 

Second.     Three  per  cent  internal-revenue  tax. 

Third.  Assay  charge  of  P  2.50  for  bullion  weighing  not  more  than  32 
kilograms,  and  P  5  for  ore. 

Fourth.     For  smelting,  when  necessary,  10  cents  per  kilogram. 

Fifth.     Refining,  when  necessary,  P  1.50  per  kilogram. 

Sixth.     Separating,  when  necessary,  P  1.25  per  kilogram. 

"The  first,  second,  and  third  charges  are  collected  on  all  bullion  brought 
for  coinage  as  well  as  on  all  metals  for  exportation,  whether  in  bullion  or 
ore.  The  fourth  is  collected  on  bullion  for  exportation  and  coinage  when 
smelting  is  necessary.  The  fifth  and  sixth  are  collected  on  metals  brought 
for  coinage  when  refining  and  separating  are  necessary."  Ibid.,  p.  1 1 2. 

A  good  historical  account  of  the  various  government  charges  imposed 
on  production,  coinage,  sale,  and  exportation  of  the  precious  metals  will  be 
found  in  Prosper  Gloner,  Les  Finances  des  Etats-Unis  Mexicains,  pp.  265- 
310. 


472         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

together  with  the  silver  subsidiary  coins  of  proportionate 
weights  and  the  same  fineness,  continued  to  be  unlimited 
legal  tender.  Contrary  to  the  common  belief,  Mexico  had 
been  for  over  two  centuries  prior  to  1904  (i.e.,  since  1675) 
legally  a  bimetallic  country,1  in  which  there  was  free  and 
unlimited,  although  not  gratuitous,  coinage  of  both  gold 
and  silver.  This  situation  was  continued  by  the  law  of 
1867,  which  provided  for  the  free  coinage  of  gold  coins 
of  denominations  varying  from  i  to  20  pesos  and  weighing 
26.1115  grains  .875  fine  to  the  peso,  thereby  containing 
22.848  grains  of  fine  gold,2  and  giving  a  mint  ratio  of 
approximately  i6J  to  i.3  All  gold  coins  as  well  as  all 
silver  coins  were  unlimited  legal  tender.  This  ratio  ap- 
peared to  be  very  favorable  to  gold  for  some  time  prior 
to  1875.  As  a  matter  of  fact,  however,  it  was  usually  un- 
favorable, when  coinage  fees,  taxes,  transportation  charges, 
and  other  expenses  were  all  taken  into  account,  and  the 
amount  of  gold  coin  in  actual  circulation  appears  always  to 
have  been  small.  Nearly  every  year  from  1873  to  1905 
witnessed  the  coinage  of  some  gold  at  the  Mexican  mints,4 
but  this  coin  does  not  appear  to  have  gone  into  general 
circulation.  Therefore,  whatever  the  Mexican  currency 
system  was  in  law,  it  was  de  facto  a  silver  standard  system. 
Monetary  statistics  of  Mexico  until  recent  years  have 
been  very  unsatisfactory,  and  even  at  the  beginning  of  the 
present  century  there  were  no  reliable  figures  as  to  the 
amount  of  money  in  circulation.  A  "monetary  census" 
officially  made  in  1903^  on  the  basis  largely  of  48,000 
letters  of  inquiry,  to  which  replies  were  received  from  only 
12,000,  accounted  for  about  61.7  million  pesos  of  coin  in 
Mexico;  of  which  in  round  numbers  P 483,000  were  gold, 

1  Hegemann,  p.  2. 

2  Ann.  Rep.  Dir.  Mint,  1901,  p.  406. 

3  Cf.  Special  Consular  Report,  1896-97,  op.  cit.  p.  112;  and  Hegemann, 
p.  6. 

4  Ann.  Rep.  Dir.  Mint,  1902,  p.  217 ;  and  passim,  1903-06. 

6  Comision  Monetario,  Mexico,  Datos  Complementarios,  etc.,  pp.  39-45 • 


ECONOMIC  CONDITIONS  IN  MEXICO  473 

P  58, 145,000  were  silver  pesos,  P  2, 972,000  were  fractional 
silver  coins,  and  P  62,000  were  copper.  Adding  to  this 
the  estimated  amount  concerning  which  no  replies  were 
received,  the  investigators  arrived  at  a  minimum  of 
Pi 00,000,000  and  a  maximum  of  Pi 20,000,000  as  their 
final  conclusion.1  The  above  estimate,  however,  mejely 
covered  metallic  money  and  did  not  include  bank  notes. 
At  the  end  of  December  1902  the  bank  note  circulation  of 
Mexico  was  in  round  numbers  86  million  pesos.2  Adding 
this  bank  note  circulation  to  the  mean  estimate  for  metallic 
money,  we  arrive  at  P  196,000,000,  or  say  P  200,000,000, 
as  the  total  amount  of  money  in  circulation  in  I903.3 

After  having  been  upon  a  de- facto  silver  standard  for  so 
many  years,  and  having  prospered  for  the  better  part  of  a 
.generation  as  the  country  had  never  prospered  before,  why 
did  Mexico  give  up  the  silver  standard  for  a  gold  standard  ? 
The  chief  reasons  for  this  action  may  be  considered  under 
the  rubrics :  government  finance,  foreign  trade,  and  the 
investment  in  Mexico  of  foreign  capital.4 

Government  Finances 

While  the  pressure  on  government  revenues  resulting 
from  the  declining  gold  value  of  silver  was  nothing  like 
so  great  in  Mexico  in  1903  as  it  was  in  India  a  decade 
before,  and  while  Mexican  finances  were  in  a  better  condi- 

1  The  estimate  divided  this  sum  as  follows :  public  offices  P  4,000,000, 
credit    institutions  P  5 1,000,000,  mercantile   establishments  P  35, 000,000, 
farms  and  factories  P  10,000,000,  and  individuals  P  20,000,000.     Ibid.,  pp.  42 
and  45. 

2  Comision  Monetaria,  Estadistica  Bancaria,  pp.  577  and  524. 

3  The  legal  reserve  requirement  of  banks  of  issue  against  notes  was  50 
percent.     Cf.  J.  Favre,  Les  Banques  au  Mexique,  pp.  40-41.     Cf.  also  infra, 
pp.  526-28. 

4  In  taking  up  these  topics  at  this  point,  it  should  be  noted  that  the  data 
concerning  them  were  incomplete  and  unorganized  when  the  Mexican  Mone- 
tary Commission  was  appointed  in  February  1903.     A  considerable  part  of 
the  data  here  used  was  collected  by  the  Commission.     Cf.  infra,  p.  497. 


474         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

tion  on  the  whole  in  1903  than  were  those  of  India  in 
1893  »  nevertheless  the  financial  burden  imposed  upon  the 
Mexican  Government  by  the  declining  price  of  silver  was 
a  very  real  one. 

The  chief  item  in  this  burden  was  the  interest  on  the 
gokj  debt.  In  1899  negotiations  were  completed  with 
certain  European  and  American  banking  houses  for  the 
conversion  of  Mexico's  entire  foreign  debt  into 

"a  five  per  cent  consolidated  external  gold  loan  due  within 
forty-five  years  at  par  by  semi-annual  drawings,  which  may 
be  increased  after  the  year  1909,  .  .  .  or  retired  by  purchase 
in  the  market  if  same  can  be  made  under  par.  Principal 
and  interest  of  the  bonds  [are  to  be]  payable  in  gold.  .  .  . 
Bonds  are  secured  by  a  special  hypothecation  of  62  per  cent 
of  the  import  and  export  duties  of  the  Republic  of  Mexico."  1 

The  total  public  debt  of  Mexico  on  June  30,  1902  was 
P  432, 516,595,  and  of  this  sum  P  238,960,000  represented 
the  foreign  debt  (consolidated  5  per  cent)  payable  in  gold.2 
Much  of  the  latter  was  incurred  for  public  works,  notably 
railroads  and  other  productive  enterprises.3  Expressed  in 
United  States  money  the  gold  debt  of  Mexico  was  approxi- 
mately $109,000,000,  and  the  annual  interest  charge  was 
approximately  $5,450,000.  The  larger  part  of  this  debt 
had  its  origin  at  times  when  a  Mexican  peso  was  worth  in 

1  A  detailed  historical  account  of  Mexico's  public  debt  down  to  1894  will 
be  found  in  Gloner,  op.  cit.,  pp.  51-154.     For  later  figures  by -years,  see 
El  Economista  Mexicano,  published  weekly  in  the  City  of  Mexico,  passim. 
For  an  itemized  statement  of  the  debt,  see  Com.  Mon.  Mex.,  Actas,  etc. 
1904,  pp.  153-54.     An  analysis  of  the  debt,  as  it  stood  in  1902-03,  will 
be  found  in  English  in,  International  Bureau  of  the  American  Republics, 
Mexico,  Geographical  Sketch,  Natural  Resources,  Laws,  Economic  Condi- 
tions, Actual  Development,  Prospects  of  Future  Growth,  1904,  in  House 
Docs.,  58th  Cong.,  3d  Sess.,  LXVI,  No.  145,  Part  5,  pp.  303-04;  here- 
after cited  as  Int.  Bur.  Am.  Reps.,  Mexico.     It  is  from  the  last  refer- 
ence that  the  above  quotation  is  made. 

2  The  gold  debt  was  computed  at  the  rate  of  22^.  (45.6  U.  S.  cents)  to 
the  peso,  the  rate  adopted  in  the  budget  of  1903-04. 

3  Cf.  Com.  Mon.  Mex.,  Actas,  etc.  pp.  153-54. 


ECONOMIC  CONDITIONS  IN  MEXICO 


475 


gold  much  more  than  it  was  in  1902  ;  in  fact  most  of  the  gold 
debt  dated  back  to  a  time  when  the  peso  was  worth  in  the 
neighborhood  of  a  United  States  gold  dollar.  The  fact, 
therefore,  that  this  gold  debt  amounted  to  P  238,960,000 
instead  of  approximately  half  that  sum  was  due  chiefly 
to  the  appreciation  of  gold  from  about  the  year  1873  to 
the  early  nineties.  A  similar  situation  existed  with  refer- 
ence to  the  interest  charges,  because  the  interest  rate  in 
gold  did  not  decline  proportionately  to  the  rise  in  the  silver 
price  of  gold.  There  was  no  great  change  in  the  principal 
of  the  public  debt  between  1896  and  1903.  If  we  assume  it 
to  have  stood  at  $109,000,000  during  this  period,1  it  would 
have  required  the  following  sums  in  pesos  to  have  paid  the 
interest  at  the  average  gold  value  of  the  Mexican  peso  as 
measured  by  New  York  exchange : 2 


YEAR 

AVERAGE  GOLD  VALUE  OF  PESO 

AMOUNT  REQUIRED  TO  PAY 
$5,450,000 

(U.  S.  Cents) 

Pesos 

1896 

52.4 

10,410,000 

1897 

46.8 

11,650,000 

1898 

46.1 

11,820,000 

1899 

48.2 

11,300,000 

1900 

48.5 

11,240,000 

1901 

47-3 

11,520,000 

1902 

41.9 

13,010,000 

1903 

42.2 

12,910,000 

There  were  two  obvious  disadvantages  in  this  situation. 
One  was  the  impossibility  of  the  Government's  framing  a 

1  It  actually  varied  between  about  $109  and  $114  million.     Int.  Bur.  Am. 
Reps.,  Mexico,  pp.  302-05. 

2  Figures  for  1896  to  1902  inclusive  were  computed  from  figures  for  New 
York  exchange  quoted  in  terms  of  pesos  to  the  $100.     Com.  Mon.  Mex., 
Datos  Estadisticos,  etc.,  table  No.  37.     For  1903  the  rate  was  computed  from 
figures  compiled  for  the  author  by  the  National  Bank  of  Mexico.     Cf .  infra, 
P-  549- 


476         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

well-balanced  budget  because  of  the  uncertainties  of  ex- 
change. An  unexpected  fall  in  the  gold  value  of  silver 
would  greatly  reduce  an  anticipated  surplus,  or  even  trans- 
form it  into  a  deficit ;  while  an  unexpected  rise  would  have 
the  opposite  effect.  The  second  disadvantage  arose  from 
the  fact  that  one  of  the  chief  sources  of  Mexican  federal 
revenue  was  customs  duties  on  imports.  These  duties 
were  collected  in  silver  or  on  a  silver  basis,  and  silver  had 
been  declining  rapidly  in  its  gold  price,  the  decline  having 
been  particularly  pronounced  since  the  fore  part  of  1901 
(see  chart  on  page  535).  Such  a  decline  in  the  price  of 
Mexico's  chief  article  of  export,  with  consequent  rise  in 
the  gold  exchanges,  therefore  cut  into  the  customs  receipts 
in  two  ways :  first,  by  tending  to  cause  a  decline  in  the 
amount  of  goods  imported  and,  second,  by  reducing  the 
gold  value  of  the  duties  paid  on  such  goods  as  continued  to 
be  imported.1 

These  difficulties  were  partly  met  by  the  device  of  a 
sliding  scale  of  customs  duties,2  a  device  which  increased 
the  rate  of  duties  as  exchange  rose,  but  ipso  facto  tended 
still  further  to  lessen  importations.  In  proposing  this 
measure  Secretary  Limantour  explained  its  purpose,  saying 
that  important  government  services  should  not  be  com- 
pelled to  suffer  because  of  fluctuations  in  the  gold  price  of 
silver,  and 

"considering  that  the  bulk  of  the  revenue  from  import 
duties  is  assigned  to  the  service  of  the  foreign  debt,  the  ob- 
vious course  seems  to  be  to  establish  by  means  of  carefully 

1  President  Diaz  said  on  September  9,  1896  :  "There  is  another  point  of 
view.     The  foreign  debt  of  the  country  is  payable  in  gold.     The  duties  on 
imported  merchandise  are  collected  in  silver,  or  on  that  basis.     The  high 
rates  of  exchange,  together  with  the  decrease  in  our  customs  collections  .  .  . 
have  caused  a  considerable  shrinkage  in  this  source  of  revenue."     Quoted 
by  Matias  Romero,  Mexico  and  the  United  States,  p.  567. 

2  Cf.  Diario  Official,  Nov.  24,  25,  and  Dec.  i,  1902.    The  law  went  into 
operation  Jan.  i,  1903.    See  also  U.  S.  Consular  Reports,  LXXI,  1903, 
pp.  176-78. 


ECONOMIC  CONDITIONS  IN  MEXICO  477 

prepared  enactments  a  close  relationship  between  that 
branch  of  revenue  and  the  rate  of  exchange,  in  such  manner 
that  the  burden  of  taxation  will  increase  or  diminish  in  pro- 
portion to  the  amounts  necessary  to  meet  our  indebtedness 
in  gold."  1 

Foreign  Trade 

As  in  the  case  of  the  other  countries  studied,  fluctuations 
in  exchange  caused  serious  disturbances  in  Mexico's  foreign 
trade.  By  far  the  greater  part  of  this  trade  was  with  gold- 
standard  countries,  and  the  ups  and  downs  of  the  price  of 
silver  were  very  important  factors  in  determining  the  profits 
realized. 

Figures  are  not  available  for  the  high  and  low  exchange 
rates  in  Mexico  on  any  gold-standard  country  for  the  ten 
years  preceding  the  currency  reform,  but  inasmuch  as  there 
was  free  coinage  of  silver  and  as  Mexican  exchange  there- 
fore normally  followed  fairly  closely  the  fluctuations  in  the 
price  of  silver,  one  may  obtain  a  fair  idea  of  exchange 
fluctuations  by  referring  to  the  fluctuations  in  the 
price  of  silver.  These  are  given  in  the  following  table, 
also  the  average  monthly  exchange  rates  in  Mexico 
on  New  York. 

The  figures  of  the  table  require  little  explanation. 
Annual  ranges  in  the  London  price  of  silver  during  the  ten 
years  1893-1902  varied  from  21.3  per  cent  in  1893,  the  year 
of  the  closing  of  the  Indian  mints  and  of  the  repeal  of  the 
Sherman  Silver  Purchase  Act,  to  5.7  per  cent  in  1896.  Even 
this  minimum  annual  range,  however,  was  sufficient  to  eat 
up  the  entire  annual  interest  on  an  ordinary  investment. 
For  the  entire  period  the  range  was  44  per  cent,  using  the 
high  rate  (38! d.)  as  the  base,  78.7  per  cent  if  one  uses  the 
low  rate  (2iH^O  as  the  base.  Judging  annual  variations  in 
Mexican  exchange  rates  on  New  York  by  average  monthly 
rates,  i.e.,  calling  the  highest  average  monthly  rate  for 

1  The  [London]  Economist,  1902,  p.  1930. 


478         THE  MEXICAN  CURRENCY  REFORM,   1903-08 


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ECONOMIC  CONDITIONS  IN  MEXICO  479 

the  year  high  and  the  lowest  low,  we  find  a  similarly 
large  annual  variation.  The  highest  range,  i.e.,  15.9 
per  cent,  was  in  1902  (although  those  of  1893  and 
1897  were  very  nearly  as  high) ;  while  the  lowest  range, 
i.e.,  3.9  per  cent,  was  in  1898;  the  range  for  the  ten- 
year  period  was  41.8  per  cent,  or  very  nearly  as  large  as 
the  range  for  the  price  of  silver. 

In  some  months  the  fluctuations  in  the  price  of  silver 
were  very  large,  as  for  example,  June  1893  (21.3  per  cent) ; 
September  1897  (12.8  per  cent) ;  and  February  1894  (10.4 
per  cent) ;  while  in  other  months  it  was  very  small,  as  for 
example  July  1894  and  February  1897  (both  0.2  per  cent). 
There  were  few  months,  however,  during  the  entire  period 
in  which  the  fluctuations  were  not  sufficient  to  be  real 
items  in  all  substantial  foreign  trade  operations. 


Influence  of  Rising  Exchange  upon  the  Returns  Received  for 
National  Products 

In  connection  with  Mexico's  foreign  trade  one  important 
factor  leading  to  the  demand  for  currency  reform  was  a 
growing  conviction  on  the  part  of  thinking  people  that  the 
decline  in  the  gold  value  of  the  peso,  as  expressed  in  rising 
exchange  rates,  was  resulting  in  the  exploitation  of  Mexico 
for  the  benefit  of  foreign  countries ;  or,  in  other  words,  in  a 
tendency  to  require  her  to  give  too  many  of  her  own  prod- 
ucts in  her  export  trade  for  the  foreign  products  she 
received  in  exchange  in  her  import  trade.  This  subject  is 
one  that  received  careful  consideration  from  the  Mexican 
Monetary  Commission  in  I9O3-1  It  was  ably  treated  in  a 
memorandum  submitted  to  that  Commission  by  the  mem- 
bers of  the  American  Commission  on  International  Ex- 
change, which  was  appointed  by  the  United  States  Secre- 
tary of  State  to  confer  with  representatives  of  the  Mexican 

1  Cf.  Com.  Mon.  Mex.,  Actas,  etc.,  pp.  67-106. 


480         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

and  Chinese  Governments.  Upon  this  subject  the  reason- 
ing of  the  American  Commissioners  was  as  follows : 

"  The  fall  in  the  gold  price  of  silver  permits  goods  to  be  sold 
abroad  for  a  falling  gold  price,  so  long  as  wages  and  the  cost 
of  materials  at  home  remain  unchanged  in  terms  of  silver, 
[since  the  exporter  receives  a  continually  larger  number  of 
local  pesos  for  each  gold  unit,  i.e.,  dollar,  pound,  etc., 
which  he  receives  abroad  for  his  product].  It  is  this  in- 
fluence which  enables  a  country  with  a  depreciating  cur- 
rency to  underbid  its  rivals  in  selling  its  products  in  markets 
where  gold  is  the  standard.  There  are  perhaps  certain 
temporary  benefits  in  this  condition,  in  extending  and  de- 
veloping the  trade  of  the  exporting  country.  It  is  an  im- 
portant question,  however,  whether  the  continuous  depre- 
ciation of  the  standard  may  not  reach  a  point  which  will 
soon  result  in  the  surrender  of  a  given  quantity  of  domestic 
goods  to  foreign  purchasers  in  exchange  for  a  continuously 
declining  quantity  of  foreign  goods." 1 

Figures  for  the  value  of  Mexico's  exports  in  terms  of 
pesos  showed  a  great  increase  from  1882  to  1902,  rising  from 
P  29.2  millions  in  1882  to  P  75.7  millions  in  1892,  and  to 
P  168.0  millions  in  I9O2.2  If  one  measured  this  increase, 
however,  in  terms  of  gold  instead  of  in  terms  of  silver  it 
did  not  appear  anything  like  as  large,  particularly  the  in- 
crease since  1892.  In  1882  the  gold  value  of  the  exports 
was  $26.1  millions,  in  1892  it  was  $63.3  millions,  and  in 
1902  $74.1  millions,  the  respective  average  gold  values  of 
the  silver  peso  for  those  three  years  having  been  $0.894, 
$0.837,  and  $0.441.  In  terms  of  percentages  the  increases 
in  the  exports  were  as  follows : 

1The  Influence  of  Falling  Exchange  upon  the  Returns  Received  for 
National  Products.  Argument  submitted  by  Messrs.  Charles  A.  Conant, 
Jeremiah  W.  Jenks,  and  Edward  Brush,  to  the  Monetary  Commission  of  the 
Republic  of  Mexico,  April  18,  1903.  Published  in  Stability  of  Exchange 
etc.,  by  the  Commission  on  International  Exchange  of  the  Republic  of 
Mexico,  45-46.  Hereafter  cited  as  Infl.  of  Fall.  Exch.,  etc. 

2  Cf.  Infl.  of  Fall.  Exch.,  etc.,  p.  46;  also  Com.  Mon.  Mex.,  Datos  Es- 
tadisticos,  etc.,  table  No.  2. 


ECONOMIC  CONDITIONS  IN  MEXICO  481 


YEAR 

SILVER  VALUES 

GOLD  VALUES 

1882 

100 

100 

1892 

259 

242 

1902 

575 

284 

Measured  in  gold,  therefore,  it  will  be  seen  that  after  1892 
the  value  of  the  exports  increased  very  slowly,  i.e.,  only 
about  a  million  dollars  a  year,  or  less  than  17  per  cent  in 
10  years;  as  compared  with  $3.7  millions  a  year,  or  142 
per  cent  for  the  preceding  10  years. 

The  American  Commissioners  next  took  up  the  question 
whether  the  increase  in  the  quantities  of  the  goods  exported 
had  merely  kept  pace  with  the  small  increase  in  their  gold 
value  or  had  been  greater  or  less.1  Aside  from  the  precious 
metals,  which  the  Commissioners  considered  separately, 
they  found  six  important  articles  of  export  representing 
29  per  cent  of  the  total  merchandise  exports  of  1892  and 
27-^  per  cent  of  those  of  1902,  for  which  comparable  figures 
were  available.  They  were  copper,  coffee,  beans,  fresh 
fruit,  ixtle,  and  dyewoods.  For  all  of  these  items  except 
dyewoods  gold  prices  were  lower  in  1902  than  in  1892. 
Computing  the  value  of  the  1902  exports  of  these  articles 
in  terms  of  their  respective  gold  prices  in  1892,  the  Com- 
missioners found  that  at  these  prices  the  articles  would  have 
been  worth  $16.9  millions,  whereas  their  actual  value  at 
1902  prices  was  but  $10.8  millions,  a  loss  of  36  per  cent. 
Assuming  the  same  percentage  loss  on  the  other  merchandise 
exports  (exclusive  of  silver)  the  Commissioners  arrived  at 
an  aggregate  loss  of  $22.5  millions  gold.2  The  exports  of 
silver  for  1902  computed  at  the  gold  prices  of  1892  would 
have  been  $22.7  millions  gold  more  valuable  than  they 
actually  were.  Adding  these  two  items  together  we  arrive 

1  Infl.  of  Fall.  Exch.,  etc.,  p.  47. 

2  Ibid.,  p.  49. 

21 


482         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

at  $45.2  millions,  say  $45  millions,1  as  the  total  loss  suffered 
by  Mexico  in  the  gold  value  of  her  exports  in  1902  when 
comparison  is  made  with  1892.  This  loss,  moreover,  was 
not  merely  for  a  single  year.  Such  losses  had  been  occur- 
ring ever  since  the  fall  in  the  gold  value  of  silver  began, 
and  their  amounts  had  been  growing  rapidly  since  1892. 

This,  however,  as  the  reader  has  doubtless  already  ob- 
served, is  only  one  side  of  the  story.  Mexico's  exports 
were  paid  for  ultimately  not  in  gold  but  in  merchandise 
imports.  Part  of  the  period  1892  to  1902,  i.e.,  1892  to  1896, 
was  a  period  in  which  gold  prices  the  world  over  were 
rapidly  falling,  or,  in  other  words,  a  period  in  which  the 
value  of  gold  was  rapidly  rising.  A  decline  in  the  gold 
prices  of  Mexico's  exports  would  have  been  a  matter  of 
small  concern,  if  the  gold  prices  of  the  foreign  goods  she 
imported  had  fallen  as  much  or  more.  The  important 
question  was  not  how  much  gold,  but  how  much  merchandise, 
Mexico  was  receiving  for  a  given  quantity  of  the  products 
she  was  exporting.  This  side  of  the  question  the  Com- 
missioners found  more  difficult  to  answer,  because  the 
articles  imported  were  of  much  greater  variety  than  the 
articles  exported,  and  were  divided  more  minutely  into 
classes  by  the  tariff  classification.  In  many  cases,  more- 
over, the  imports  were  of  such  a  character  that  it  was  im- 
possible to  classify  them  in  physical  quantities,  and  they 
were  entered  in  custom  house  money  returns  only  by  their 
money  values.2  Selecting  ten  groups  of  articles  for  which 
comparable  figures  were  available  for  approximately  the 
two  dates,  i.e.,  for  the  years  1893  and  1902,  articles  repre- 
senting 18.66  per  cent  of  the  gold  import  values  of  1893, 
the  Commissioners  found  that  these  goods  were  worth 
$15.0  millions  in  1902,  and  at  1893  prices  they  would  have 

1  In  one  place  the  Commissioners  give  the  figure  as  $50  millions  (p.  50), 
and  in  another  as  $40  millions  (p.  51).    The  computations  are  at  best  very 
rough  approximations  as  the  trade  figures  themselves  are  far  from  reliable. 

2  Ibid.,  p.  50. 


ECONOMIC  CONDITIONS  IN   MEXICO  483 

been  worth  $18.5  millions,  representing  a  decline  of  18.7 
per  cent,1  as  compared  with  a  decline  of  36  per  cent  for  the 
articles  exported.  Extending  this  ratio  of  18.7  per  cent  to 
the  total  imports  for  1902,  they  found  a  total  decline  in 
gold  values  of  $14.1  millions.  Setting  this  gain  in  import 
values  against  the  estimated  loss  of  $45  millions  on  export 
values,  we  arrive  at  $30.9  millions  as  the  net  loss.  The 
Commissioners'  figures  gave  a  net  loss  of  $26  millions,  but 
this  they  considered  as  probably  too  small,  after  a  study  of 
the  prices  of  certain  specified  commodities  exported  to 
Mexico  from  the  United  States.2  After  making  numerous 
qualifications,  and  pointing  to  the  fact  that  many  forces 
besides  monetary  forces  were  at  work,  the  Commissioners 
concluded  that  Mexico  had  in  recent  years  been  expending 
a  growing  proportion  of  her  own  labor  and  intellectual  effi- 
ciency in  return  for  a  given  amount  of  foreign  products ; 
and  that  if  this  were  due  even  in  part  to  the  monetary 
system,  as  the  Commissioners  believed  it  was,  it  was  an 
evil  of  the  most  serious  character,3  since  it  involved  a  pro- 
gressive impoverishment  of  the  economic  resources  of  the 
country  and  the  needless  enrichment  of  those  with  whom 
Mexico  traded.4 


llbid.,  p.  51. 

2  Ibid.,  pp.  51-52. 

8  Ibid.,  p.  55. 

4  Only  a  few  years  before  1892  Mexico  appears  to  have  profited  decidedly 
by  the  movements  of  the  gold  price  of  silver,  if  we  can  accept  the  figures 
of  Franciso  Bulnes.  His  computations  showed  that  in  1875  the  cost  of 
Mexico's  merchandise  imports  was  $18.9  millions;  and  that  for  the  same 
commodities  in  1885  the  cost  would  have  been  but  $12.7  millions  in  conse- 
quence of  the  great  fall  in  gold  prices.  This  was  a  decline  of  approximately 
34  per  cent.  Similar  figures  were  computed  for  the  value  of  Mexico's  mer- 
chandise exports  in  1875  at  the  prices  of  1885,  and  the  result  showed  a  de- 
cline of  only  6.8  per  cent,  and,  if  silver  exports  were  also  included,  a  decline 
of  14  per  cent.  But  if  Mexico's  imports  had  declined  on  the  average  34  per 
cent  in  their  gold  prices,  and  her  exports  had  declined  in  their  gold  prices 
only  14  per  cent,  Bulnes  thought,  the  country  had  little  reason  to  complain 
of  the  price  situation.  Francisco  Bulnes,  Cris.  Mon.,  p.  131  ff.,  quoted  by 
Hegemann,  op.  cit.,  pp.  58-59. 


484         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

Investment  of  Foreign  Capital 

The  subject  of  the  investment  of  foreign  capital  in  Mexico 
played  a  very  important  role  in  the  discussion  leading  to 
the  monetary  reform.  Mexico  was  a  comparatively  unde- 
veloped country,  rich  in  natural  resources  but  with  little 
home  capital  with  which  to  exploit  them.  For  generations 
foreign  capital  had  been  flowing  into  the  country ;  but  while 
profits  were  often  large,  so  also  were  risks,  and  the  number 
of  Mexican  ventures  involving  large  investments  of  foreign 
capital  that  had  "gone  on  the  rocks"  was  great.  Since  the 
recovery  from  the  panic  and  depression  of  1893-94,  when 
Mexico  suffered  severely  from  the  sudden  drop  in  silver 
resulting  from  the  closing  of  the  Indian  mints  and  the  repeal 
of  the  Sherman  Silver  Purchase  Act,  the  finances  of  the 
country  had  been  rapidly  improving,  thanks  largely  to  the 
enlightened  policies  of  Finance  Minister  Limantour.  Dur- 
ing the  period  1894-1903  foreign  investments  in  Mexico 
had  been  growing  rapidly,  particularly  from  England,  the 
United  States,  France,  and  Germany.1  How  much  they 
amounted  to  in  1903  no  one  knew,  as  no  comprehensive  stat- 
tistics  had  been  collected.  The  task  of  computing  such 
statistics  was  in  1903  assigned  to  a  subcommission  of  the 
Mexican  Monetary  Commission,  and  from  its  report  we 
can  form  an  imperfect  idea  of  the  extent  of  these  invest- 

1  "The  great  drygoods  houses  and  cotton  mills  are  French,  as  is  also  much 
of  the  older  capital  invested  in  banking.  The  Spaniard,  frugal  and  thrifty, 
handles  the  cattle  and  grain  trade  and  sells  groceries.  Hardware  and  jewelry 
are  the  chosen  field  of  the  German.  The  newer  banks  and  the  dealing 
in  machinery  constitute  a  part  of  the  American's  activities.  His  money, 
with  that  of  the  English,  has  also  taken  up  the  heavy  investments  of  mines, 
railroads  and  light,  traction  and  power  plants,  although  there  is  other 
European  capital  as  well  employed  in  investments  of  this  nature.  The 
opening  up  and  breaking  in  of  the  hot  country  or  tropical  lowlands,  from  the 
developed  fertility  of  which  great  results  are  anticipated,  owes  its  recent 
advancement  to  the  pioneering  of  the  American."  Morrill  W.  Gaines, 
Effects  of  the  Silver  Standard  in  Mexico,  in  Yale  Review,  XII,  1903,  p.  278. 

On  the  subject  of  the  history  of  foreign  investments  in  Mexico  from  1810 
to  1904  see  Hegemann,  op.  cit.,  chap.  4. 


ECONOMIC  CONDITIONS  IN  MEXICO  485 

ments.  It  should  be  noted  that  this  subcommission  ex- 
perienced great  difficulty  in  securing  data  on  the  subject, 
and  that  its  figures  are  far  from  complete.  They  repre- 
sent an  "extreme  minimum."  Briefly,  and  in  round 
numbers,  they  may  be  summarized  as  follows : l 

000,000 

(1)  Foreign  capital  invested  in  banking,  mining,  agriculture, 
mercantile  and  industrial  enterprises P  136.1 

(2)  Insurance  companies  of    various   kinds.     Estimated  by 
capitalizing  at  5  per  cent  the  estimated  net  profits 16.9 

(3)  Railroads,  deducting  government  subventions  of  ^87.4 
millions  to  foreign  owned  property 767.2 

(4)  Public  debt  2 432.5 

Total 1,352.7 

Converting  this  to  United  States  currency  at  the  official 
rate  of  22?d.  to  the  peso,  and  counting  $4.8665  to  the 
pound  sterling,  we  arrive  at  a  total  foreign  investment  in 
Mexico  of  $617  millions. 

In  like  manner  the  subcommission  estimated  the  annual 
net  payments  due  to  foreigners  for  interest,  rents,  and  profits, 
at  P  49. 2  millions,  which  would  be  equal  to  $22.4  millions.3 

These  investments  fall  into  two  broad  classes  from  the 
standpoint  of  the  currency  problem  :  (i)  direct  investments 
made  for  the  account  of  foreign  capitalists;  and  (2)  in- 
direct investments  made  for  the  account  of  Mexican  pro- 
prietors in  the  form  of  loans  to  these  proprietors. 

The  first  class  was  represented  chiefly  by  the  ownership 
of  stocks  in  Mexican  corporations,  and  by  the  individual 
or  partnership  ownership  of  Mexican  properties  of  every 

1  Com.  Mon.  Mex.,  Actas,  etc.,  pp.  148-55. 

2  Out  of  a  total  public  debt  of  P  432.5  millions  all  but  P  15.0  was  held 
abroad,  and  most  of  this  small  sum  held  in  Mexico  was  apparently  owned  by 
resident  foreigners.     Ibid.,  p.  154. 

8  The  conservative  character  of  these  estimates  will  be  appreciated  when 
it  is  noted  that  United  States  Consul-General  Barlow,  in  a  report  in  1902, 
stated  that  the  amount  of  United  States  capital  invested  in  Mexico  by  1,117 
United  States  companies,  farms,  and  individuals  was  in  round  numbers  $500 
millions.  Internat.  Bur.  Am.  Reps.,  Mexico,  op.  cit,  p.  257. 


486         THE  MEXICAN   CURRENCY  REFORM,   1903-08 


kind.  Profits  in  these  enterprises  were  not  only  realized  but 
paid  in  local  pesos ;  and  upon  the  shoulders  of  the  foreign 
investor  were  placed  the  risks  incident  to  a  fluctuating 
exchange.  When  the  gold  value  of  the  peso  rose,  i.e.,  when 
exchange  fell,  the  foreign  investor  received  more  dollars, 
pounds,  or  francs  for  each  P  100  of  profits ;  when  the  gold 
value  of  the  peso  fell  he  received  less.  Upon  this  point  the 
subcommission  concluded  after  a  careful  study  of  the  facts : l 

"  Since  the  rise  in  the  exchanges,  although  gradual,  has  been 
none  the  less  continuous,  the  capitalists  who  have  invested 
their  capital  in  Mexico  are  not  able  to  withdraw  it  from  the 
country  because  to  convert  it  into  gold  would  result  in  a 
considerable  loss ;  nor  is  it  agreeable  to  leave  it  invested, 
because  every  day  its  gold  value  declines  further.  .  .  . 
Although  these  properties,  such  as  stocks  of  banks  and  of 
industrial  concerns,  have  risen  in  price  in  terms  of  pesos, 
and  the  dividends  received  have  been  growing,  these  in- 
creases have  not  been  sufficient  to  compensate  for  the  loss 
in  the  principal  and  interest,  due  to  the  declining  gold  value 
of  the  peso.2 

The  second  class  of  investments,  i.e.,  "the  indirect  in- 
vestments," was  represented  chiefly  by  loans  made  in  gold 

1  Com.  Mon.  Mex.,  Actas,  etc.,  p.  89. 

2  An  illustration  is  found  in  the  profits  of  the  Mexican  Central  Railroad. 
These  profits  per  mile  expressed  in  pesos  and  in  United  States  dollars  for 
the  period  1891-97  were  as  follows : 


YEAR 

PESOS 

DOLLARS 

1891 

4169 

3236 

1892 

4146 

2896 

1893 

4322 

2701 

1894 

4530 

2351 

1895 

5069 

2683 

1896 

5352 

2837 

1897 

6552 

3129 

Com.  Mon.  Mex.,  Datos,  etc.,  p.  68. 


ECONOMIC  CONDITIONS  IN  MEXICO  487 

and  repayable  principal  and  interest  in  gold.  Its  most  im- 
portant forms  were  the  gold  bonds  of  the  Government  and 
of  the  railroad  companies.  Here  the  chief  burden  of  a  de- 
clining gold  price  of  silver  fell  directly  upon  the  shoulders 
of  the  Mexican  people,  since  the  obligations  for  principal 
and  interest  in  terms  of  gold  remained  unchanged  whether 
the  peso  was  worth  50  cents  or  40  cents.  But  in  the  latter 
case  it  would  have  required  P  1 25  to  meet  the  annual  interest 
upon  a  $1000  five  per  cent  gold  bond,  whereas  in  the  former 
it  would  have  required  but  P 100.  To  pay  off  the  princi- 
pal at  the  former  rate  would  have  required  P  2000  and  at 
the  latter  P25oo.  Inasmuch  as  the  revenues  from  which 
the  interest  and  principals  of  such  gold  debts  were  paid 
-  revenues  from  taxes  in  the  case  of  the  government  debt, 
revenues  from  railway  freight  and  passenger  services  in  the 
case  of  the  railway  debts,  and  from  the  sale  of  commodities 
and  services  in  the  case  of  the  other  business  debts  — 
could  not  be  increased  in  proportion  as  the  gold  value  of  the 
peso  fell,  debtors  found  it  increasingly  difficult  to  meet  their 
obligations  punctually,  while  creditors  suffered  from  the 
resulting  impairment  of  their  debtors'  credit  and  financial 
ability.1 

This  situation  was  making  it  increasingly  difficult  to 
induce  foreign  capitalists  to  invest  in  Mexico,  and,  as  we 
have  seen,  it  was  largely  upon  foreign  capital  that  Mexico 
depended  for  the  opening  up  and  development  of  her  great 
resources. 

Three  evils,  then,  with  their  harmful  effects  upon  different 
classes  in  the  community,  were  the  chief  reasons  advanced 
by  those  favoring  the  fixing  of  Mexican  exchange  at  a 
definite  par  with  gold.  Summarizing,  they  were  :  (i)  the 
uncertainties  and  the  losses  which  an  unstable  exchange 

1  From  January  1901  to  November  1902  the  London  price  of  silver  fell 
from  2g&d.  to  2i^d.  "This  sudden  fall  in  the  price  of  silver  shook  the 
foundations  of  all  enterprises  in  Mexico,  which  were  compelled  to  meet  in- 
terest obligations  on  their  foundation  capital  in  gold.  Those  in  the  worst 
situation  were  the  Mexican  railroads."  Hegemann,  p.  1 20. 


488         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

brought  to  the  government  budget;  (2)  the  inhibitions 
upon  the  import  trade,  and  consequent  rise  in  prices  of  im- 
ported goods,  along  with  the  overstimulation  of  the  export 
trade  resulting  in  the  undue  exploitation  of  Mexican  re- 
sources for  the  benefit  of  foreigners;  and  (3)  the  inter- 
ference with  foreign  investments  in  Mexico  and  the  in- 
creasing difficulty  on  the  part  of  Mexicans  of  meeting  the 
obligations  in  gold  already  incurred. 

Other  evils  might  be  mentioned,  such  as  the  speculative 
element  an  unstable  exchange  brought  into  business 
transactions,  the  disturbing  influences  it  had  upon  local 
prices,  and  the  tendency  a  declining  gold  value  of  the  peso 
had  to  oppress  the  laboring  classes  through  the  fact  that 
their  wages  tended  to  lag  behind  prices  in  the  resulting 
upward  movement.1 

Alleged  Advantages  of  the  Silver  Standard 

It  must  not  be  supposed  that  intelligent  opinion  in  Mexico 
was  anything  like  unanimous  in  favor  of  a  gold  standard. 
Such  was  far  from  being  the  case,2  although  the  great 
fall  in  silver  of  1901  and  1902  appears  greatly  to  have  in- 
creased the  sentiment  in  that  direction.  That  Mexico  had 
made  remarkable  progress  under  the  silver  standard  there 
could  be  no  question.3  How  far  that  progress  could  be 

1  The  Mexican  Commission  on  International  Exchange  in  the  memoran- 
dum handed  in  June  3,  1903  (pp.  3-4)  cited  seven  ways  in  which  the  low 
value  of  the  peso  and  the  violent  fluctuations  in  exchange  had  injured  Mexico. 
They  all,  however,  are  comprehended  in  the  reasons  given  above. 

2  As  late  as  1898  Matias  Romero,  Minister  of  Mexico  to  the  United  States, 
wrote :  "Everybody  in  Mexico,  that  is,  from  the  educated  to  the  ignorant, 
from  the  rich  to  the  poor,  from  the  natives  to  the  foreigners,  and  even  the 
bankers  who  in  other  countries  are  decidedly  favorable  to  the  gold  standard, 
are  all  in  favor  of  silver.    The  Government  holds  the  same  opinion.    As 
Mexico  is  now  prosperous  a  large  portion  of  the  people  attribute  its  pros- 
perity to  the  silver  standard  and  are  therefore  decidedly  favorable  to  the 
continuance  of  that  standard."    Mexico  and  the  United  States,  pp.  576-77- 

3  "A  reason  put  forth,  as  being  decisive  against  plans  of  monetary  reform, 
is  that  the  country  has  never  been  so  prosperous  and  so  well  off  as  when  the 


ECONOMIC  CONDITIONS  IN  MEXICO  489 

attributed  to  the  silver  standard,  how  far  it  was  in  spite  of 
the  silver  standard,  and  how  far  the  matter  of  the  monetary 
standard  was  an  affair  of  practical  indifference,  it  was  im- 
possible to  say.  Whether  or  not  that  standard  would  have 
been  permanently  and  broadly  beneficial,  there  seemed  to  be 
little  question  but  that  temporarily  at  least  it  was  benefiting 
certain  interests,  and  these  interests  were  naturally  favorable 
to  its  continuance.  The  limits  of  this  book  will  permit  no 
more  than  a  brief  summary  of  these  supposed  advantages : 
Advantage  to  the  Silver  Industry.  In  the  fore  front 
stands  the  advantage  to  the  silver  industry  itself  —  aside 
from  agriculture,  the  chief  industry  of  Mexico.  Although 
the  relative  importance  of  exports  of  silver  had  been  de- 
clining for  seven  years,  the  industry  still  was  providing 
approximately  half  of  the  total  exports.1  To  this  industry 
the  advantages  of  the  silver  standard  were  mainly  two : 
(a)  it  provided  through  the  system  of  free  coinage  an  un- 
limited home  market  for  silver  at  a  fixed  price;  (b)  it 
tended  to  keep  wages  constant  in  terms  of  silver  (reducing 
them  in  terms  of  gold)  although  the  gold  value  of  silver 
was  depreciating.2  The  advocates  of  a  gold  standard  gen- 
erally seemed  to  take  it  for  granted  that,  should  a  gold 
standard  be  adopted,  it  would  be  necessary  for  the  Govern- 
ment to  make  some  compensatory  concessions  to  the 
silver  industry. 

depreciation  of  the  white  metal  was  most  pronounced.  .  .  .  Though  it 
may  seem  paradoxical  (thus  to  this  day  argue  some  of  the  advocates  of 
the  status  quo)  the  fact  is  that  the  period  of  the  country's  greatest  prosperity 
has  been  precisely  that  during  which  the  price  of  silver  was  lowest." 
Finance  Minister  Limantour,  Com.  Int.  Exch.,  Rep.  1904,  p.  425. 

Cf.  also  British  Diplomatic  and  Consular  Reports,  Mexico,  1904. 

*In  1885  silver  constituted  70  per  cent  of  the  total  exports;  in  1890, 
6 1  per  cent;  in  1895,  56  per  cent;  and  in  1901,46  per  cent.  Com.  Mon. 
Mex.,  Datos  Estadisticos,  etc.,  Table  No.  4. 

2  The  chief  disadvantage  of  the  silver  standard  to  the  silver  industry  was 
the  fact  that  many  of  its  supplies,  such  as  machinery  and  quicksilver, 
had  to  be  imported  from  gold  standard  countries  at  an  ever  increasing 
silver  expense. 


490         THE  MEXICAN  CURRENCY  REFORM,   1903-08 


Stimulus  to  the  Export  Trade.1  A  second  line  of  argument 
of  which  much  was  made  was  the  familiar  one,  that  a  de- 
preciating unit  of  value  stimulated  the  export  trade  by 
giving  to  the  home  producer  an  ever  increasing  number  of 
pesos  for  each  unit  of  gold  paid  him  for  his  products  ex- 
ported abroad. 

The  total  annual  exports,  exclusive  of  silver,  measured 
both  in  pesos  and  United  States  dollars,  and  the  average 
annual  gold  value  of  the  peso  in  terms  of  United  States 
currency,  for  the  period  1884-85  to  1901-02,  in  round  num- 
bers were  as  follows : 2 


YEAR 

EXPORTS 

(PESOS) 

EXPORTS 
(DOLLARS) 

VALUE  OF  PESO 
(U.S.  CENTS) 

000,000 

000,000 

1884-85 

13-9 

I2.O 

86.4 

1885-86 

14.8 

12.  1 

81.6 

1886-87 

16.3 

12.9 

79.0 

1887-88 

18.7 

14.2 

75-9 

1888-89 

22.2 

l6.4 

73-9 

1889-90 

24.6 

18.6 

75-8 

1890-91 

27.9 

23-4 

83-7 

1891-92 

27-5 

23.0 

83-7 

1892-93 

32.6 

21.4 

65.7 

1893-94 

34-5 

18.6 

53-9 

1894-95 

46.9 

24.1 

51-4 

1895-96 

51-0 

27-3 

53-6 

1896-97 

58.2 

29.4 

50.6 

1897-98 

70.4 

31-5 

44-8 

1898-99 

81.2 

38.3 

47.2 

1899-1900 

94-7 

45-i 

47.6 

1900-01 

85-6 

41.8 

48.8 

1901-02 

108.5 

47-9 

44.1 

1  Cf .  report  of  the  Fourth  Subcommission  of  the  Mexican  Monetary  Com- 
mission discussed  later  (pages  500-502)  on  the  question :  "  Has  the  rise  in 
foreign  exchange  rates  protected  and  stimulated  national  production,  and, 
if   so,   has  this  protection   extended   itself  to  producers  and  consumers 
alike?  "     Com.  Mon.  Mex.,  Actas,  etc.,  pp.  68-88. 

See  also  Jaime  Gurza,  Influencia  de  la  Depreciacion  de  la  Plata  sobre  le 

2  Based  upon  figures  computed  by  the  Mexican  Monetary  Commission, 
Com.  Mon.  Mex.,  Datos  Estadisticos,  etc.,  Tables  Nos.  i  and  4. 


ECONOMIC  CONDITIONS  IN  MEXICO  491 

An  examination  of  the  table  will  show  that  exports  measured 
in  pesos  moved  in  the  opposite  direction  from  the  movement 
of  the  gold  value  of  the  peso,  when  that  gold  value  was 
falling.  Of  the  17  years  for  which  the  table  makes  com- 
parisons possible,  the  gold  value  of  the  peso  fell  in  10  years, 
and  in  each  of  these  years  there  was  a  substantial  increase 
in  the  peso  value  of  the  exports.  In  six  of  the  other  seven 
years  the  gold  value  of  the  peso  rose  —  in  one  it  was  un- 
changed —  but  in  five  of  these  six  the  peso  value  of  the  ex- 
ports also  rose.  The  writer  has  calculated  for  these  figures, 
according  to  the  method  of  Karl  Pearson,  the  coefficient  of 
correlation.  In  conformity  with  the  theory  that  a  decline 
in  the  gold  value  of  a  silver  or  a  fiduciary  monetary  unit 
stimulates  exports  to  gold  standard  countries,  the  coefficient 
is  the  remarkably  high  inverse  one  of  —  .867  ±  a  probable 
error  of  .0392. 

One  obvious  objection  to  this  comparison  is  the  fact  that 
the  exports  are  computed  in  terms  of  value  instead  of  in 
terms  of  units  of  quantity,  for  which  adequate  data  are  not 
available,  and  that  a  decline  in  the  gold  value  of  the  peso 
would  of  itself  naturally  be  expected  to  find  expression  in 
higher  prices,  and  hence,  in  larger  export  values  as  meas- 
ured in  pesos.  This  objection  is  within  limits  a  valid  one, 
but  it  is  weakened  by  two  qualifications :  (i)  the  well-es- 
tablished fact  that  down  to  the  year  1892  the  decline  in  the 
gold  price  of  silver  was  chiefly  an  expression  of  a  rise  in  the 
value  of  gold  rather  than  of  a  decline  in  that  of  silver  j1  and 

Progreso  de  Mexico.  Com.  Mon.  Mex.,  Datos  para  el  Estudio  de  la  Cues- 
tion  Monetaria  en  Mexico,  etc.,  pp.  63-9 ;  E.  Nasse,  Das  Sinken  der  Waren- 
preise  wahrend  der  letzten  15  Jahren,  in  Jahrb.  f.  Nationaloek.  u.  Statistik, 
Neue  Folge,  Bd.  17,  1888,  pp.  50  and  129;  and  Eugene  Viollet,  Le  Proble"me 
de  1'Argent  et  I'Etalon  d'Or  au  Mexique,  Part  i,  chaps.  3-6;  and  Matias 
Romero,  Mexico  and  the  United  States,  pp.  596-604. 

1  Cf.  table  based  upon  Sauerbeck's  index  numbers  and  the  London  price 
of  silver  showing  in  terms  of  purchasing  power  in  England  the  variations 
in  the  value  of  gold  and  in  that  of  silver  annually,  1870-1903.  J.  F.  Johnson, 
Money  and  Currency,  p.  251. 


492         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

(2)  the  fact  so  often  mentioned  in  these  essays,  that  price 
changes  in  a  silver  or  fiduciary  standard  country  normally 
lag  far  behind  changes  in  the  gold  value  of  the  money  unit. 

If  we  measure  the  exports  in  gold  values  instead  of  silver 
values,  we  find  that  of  the  ten  years  in  which  the  gold  value 
of  the  peso  fell  eight  showed  an  increase  in  exports  and  only 
one  a  decrease.  The  coefficient  of  correlation  for  the  move- 
ment of  the  gold  value  of  the  peso  and  the  gold  value  of 
exports  is  —  .776  ±  a  probable  error  of  .0628.  This  is  a 
high  inverse  correlation,  though  considerably  lower  than 
the  —  .867  found  for  prices  measured  in  pesos. 

Despite  these  high  coefficients  of  correlation,  the  writer 
believes  that  this  statistical  evidence  is  far  from  conclusive, 
and  that  the  deductive  argument  affords  the  strongest 
ground  for  believing  that  a  declining  price  of  silver  stimu- 
lated the  Mexican  export  trade.  The  reason  for  this  opinion 
may  be  stated  in  a  few  words.  The  population  of  Mexico 
was  growing,  and  without  any  artificial  stimulation  whatever 
there  would  have  been  a  normal  tendency  for  exports  to 
increase.  According  to  the  table  they  increased  in  terms  of 
pesos  in  15  of  the  17  years  1  including  five  of  the  six  years 
in  which  silver  rose.2  This  fact  coupled  with  the  doubtful 
value  of  Mexico's  trade  statistics  during  the  earlier  years, 
and  the  fact  that  the  figures  are  in  values  and  not  in  units 
of  quantity,  make  it  appear  wiser  to  rely  chiefly  upon  a 
priori  reasoning,  and  upon  the  testimony  of  those  familiar 
with  the  particular  export  industries.  These  methods, 

1  In  terms  of  gold  they  increased  in  13  of  the  17  years. 

2  According  to  the  theory  in  its  converse  form  a  falling  gold  value  for  the 
peso  should  have  inhibited  imports.     For  the  lo-year  period  1892-93  to 
1901-02  inclusive,  for  which  import  figures  are  given,  while  the  gold  value  of 
the  peso  fell  in  five  years  and  rose  in  four,  the  silver  value  of  the  total  im- 
ports rose  in  eight  years,  including  every  year  but  one  in  which  the  gold  value 
of  the  peso  fell.     However,  in  only  two  of  the  five  years  in  which  the  gold 
value  of  the  peso  fell  did  the  gold  value  of  the  imports  rise ;  while  in  all  four 
of  the  years  in  which  the  gold  value  of  the  peso  rose  the  gold  value  of  the 
total  imports  also  rose.    Cf.  Com.  Mon.  Mex.,  Datos  Estadisticos,  etc., 
Table  No.  13. 


ECONOMIC  CONDITIONS  IN  MEXICO  493 

however,  in  the  main  substantiate  the  testimony  of  the  crude 
statistics.  The  a  priori  argument  that  the  declining  value 
of  the  peso  encouraged  the  production  and  exportation  of 
agricultural  articles  was  strong ;  and  the  export  figures  for 
certain  products  such  as  heniquen,  coffee,  and  beans  were 
favorable  to  that  conclusion.1 

On  the  other  hand,  the  argument  in  favor  of  a  continuance 
of  the  silver  standard  in  Mexico  because  of  the  encourage- 
ment to  the  export  trade  resulting  from  the  decline  in  the 
gold  value  of  silver  was  weaker  for  Mexico  than  for  most 
countries  for  two  reasons :  first,  because  approximately 
half  of  Mexico's  exports  consisted  of  the  depreciating  silver 
itself,  whose  production  and  exportation  obviously  was 
not  stimulated  by  the  decline ;  and  second,  because  Mexico 
in  her  recent  development  was  largely  dependent  upon 
foreign  countries  for  her  supplies  of  machinery,  quicksilver 
for  the  silver  mining  industry,2  railroad  materials,  and  raw 
cotton  —  articles  whose  peso  cost  was  greatly  increased  by 
the  decline  in  silver. 

Protection  to  Home  Industries.  The  common  argument 
that  a  rising  exchange,  though  perhaps  beneficial  to  the 
export  trade,  is,  per  contra,  harmful  to  the  import  trade, 
since  it  requires  an  ever  increasing  number  of  pesos  to  buy  a 
given  amount  of  foreign  goods  at  fixed  gold  prices,  was  used 
by  the  advocates  of  silver  as  an  argument  for  the  silver 


1  Cf.  Romero,  op.  cit.,  pp.  596-604,  and  Com.  Mon.  Mex.,  Datos  Esta- 
dfsticos,  etc.,  Table  No.  4. 

"Agricultural  products  have  been  diversely  affected  according  to  the 
nature  of  the  several  crops.  No  one  can  question  that  the  production  of 
fibre,  particularly  heniquen,  has  received  a  vigorous  impetus  and  that  that 
impetus  is  due  largely  to  the  rise  in  the  rate  of  exchange.  The  same  may  be 
said  of  certain  cereals,  such  as  beans  and  chick  peas,  and  of  dried  fruits,  as 
well  as  of  untanned  skins,  though  extraneous  causes  have  also  influenced  the 
upward  movement.  .  .  .  Finally,  coffee,  tobacco,  vanilla,  and  a  number  of 
articles  which  are  exported  on  a  small  scale  do  not  seem  to  have  been  bene- 
fited to  a  marked  extent.  .  .  ."  Finance  Minister  Limantour,  Com. 
Int.  Exch.,  Rep.  1904,  pp.  425-26. 

8  Cf.  Hegemann,  pp.  62-64. 


494         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

standard.  For,  said  they,  this  inhibition  of  imports  pro- 
vides an  effective  protection  to  home  industries.  This 
reasoning  placed  in  their  hands  nearly  all  the  familiar 
weapons  of  the  advocates  of  a  high  protective  tariff,1  the 
chief  of  which  was  the  infant  industry  argument.  It  was 
claimed  that  the  decline  in  silver  was  encouraging  the 
building  of  numerous  manufacturing  establishments  in 
Mexico,  including  cotton  and  woolen  mills,  and  alcohol, 
paper,  and  cigar  factories ; 2  and  that  it  was  causing 
American  factories  to  establish  branches  in  Mexico  to 
supply  the  Mexican  trade.  The  local  traffic  on  Mexican 
railroads,  moreover,  was  said  to  be  benefiting  at  the  ex- 
pense of  the  through  traffic  from  the  United  States. 

"One  of  the  leading  directors  of  the  Mexican  Central 
Railroad,"  said  Romero  in  1896,  "has  informed  me  that 
about  ten  years  ago  the  supplies  imported  to  operate  that 
road  amounted  to  60  per  cent  of  all  the  material  used,  and 
that  to  save  the  loss  on  exchange,  the  Company  has  been 
following  the  system  of  manufacturing  in  Mexico  all  that 
they  possibly  can,  and  that  the  proportion  of  foreign  sup- 
plies imported  during  the  last  year  has  been  reduced  now  to 
20  per  cent,  and  that  they  have  decided  to  use  Mexican 
rails,  as  soon  as  they  can  be  manufactured  in  Mexico.3 

1  Cf.  Romero,  pp.  596-600. 

2  Cf.  supra,  pp.  479—80. 
*  Romero,  p.  598. 


CHAPTER  III 

COMMISSIONS  INVESTIGATE  THE  SUBJECT   OF  CURRENCY 
REFORM  FOR  MEXICO 

Commissions  on  International  Exchange.  One  of  the  first 
steps  taken  by  Mexico  in  the  direction  of  monetary  reform 
was  a  move  to  obtain  uniformity  of  action  in  certain  matters 
on  the  part  of  silver  standard  countries.  In  this  effort  it 
secured  the  cooperation  of  China;  and  in  January  1903 
the  two  Governments  submitted  to  the  United  States 
Government  practically  identical  notes  asking  its  coopera- 
tion in  seeking  a  remedy  for  the  evils  arising  from  the  ex- 
isting unstable  exchange  relations  between  gold  standard 
countries  and  silver  standard  countries.  The  note *  men- 
tioned sixteen  silver  standard  countries  whose  total  import 
trade  in  1902  was  $575,000,000,  by  far  the  larger  part  of 
which  was  with  gold  standard  countries ;  it  showed  how 
the  declining  price  of  silver  put  up  barriers,  analogous  to 
tariff  barriers  in  their  effect,  against  that  trade,  to  the  detri- 
ment of  silver  countries  and  gold  countries  alike ;  it  referred 
to  the  interference  of  this  decline  in  silver  with  foreign  in- 
vestments in  Mexico ;  and  pointed  out  the  importance  of 
silver  and  its  by-products  of  gold,  copper,  and  lead  as 
mineral  products  in  both  Mexico  and  the  United  States. 
There  was  a  disclaimer  in  the  note  of  any  intention  of  re- 
viving the  question  of  bimetallism,  or  of  bringing  about 
any  material  changes  in  the  currencies  of  gold  standard 
countries.  It  was  merely  desired  "that  the  governments 
of  gold  countries  having  dependencies  where  silver  is  used 

1  Int.  Exch.  Com.,  Rep.  1903,  pp.  38-47. 
495 


496         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

and  the  governments  of  silver  countries  shall  cooperate  in 
formulating  some  plan  for  establishing  a  definite  relationship 
between  their  gold  and  silver  moneys,  and  shall  take  proper 
measures  to  maintain  such  relationship. "  1 

The  request  was  favorably  received  by  the  United  States, 
and  the  appointment  of  an  American  commission  was  au- 
thorized by  an  Act  of  March  3,  1903.  On  April  21  Secre- 
tary Hay  appointed  as  American  Commissioners  Hugh  H. 
Hanna,  Charles  A.  Conant,  and  Jeremiah  W.  Jenks.2  The 
American  Commission,  together  with  the  Mexican  Com- 
mission, went  to  Europe  and  consulted  with  Commissions 
appointed  by  the  Governments  of  Great  Britain,  Holland, 
Germany,  and  Russia.  A  two-volume  report 3  was  made 
by  the  Commission  which  contained  many  data  of  value  to 
the  Mexican  Government  in  working  out  its  plan  of  reform, 
and  was  also  of  use  to  other  countries  like  the  Philippines, 
Panama,  and  the  Straits  Settlements,  which  were  at  that 
time  about  to  adopt  a  gold  standard  currency.  The  Mexi- 
can and  American  Commissions  favored  the  gold-exchange 
standard  for  countries  about  to  give  up  the  silver  standard, 
and  upon  the  soundness  of  the  Commission's  general  prop- 
osition in  favor  of  the  gold-exchange  standard  "  there  was 
universal  agreement  at  every  European  capital  where  the 
subject  was  presented."  4  Except  for  Russia,  all  the  coun- 
tries consulted  favored  the  adoption  of  a  relatively  uniform 
ratio  of  about  3  2  to  i  in  the  currency  systems  to  be  estab- 
lished in  the  Orient  by  those  countries  and  dependencies 
which  were  considering  a  change  in  their  existing  systems. 
The  two  Commissions  did  not  succeed,  however,  in  inducing 

1  Int.  Exch.  Com.,  Rep.  1903,  p.  41. 

2  For  letter  of  instructions  to  the  American  Commissioners,  see  ibid.,  pp. 
46-47. 

3  Commission   on   International   Exchange,    Stability   of   International 
Exchange,  etc.,  1903;   and  Report  on  the  Introduction  of  the  Gold-Ex- 
change Standard  into  China,  the  Philippine  Islands,  Panama,  and  other 
Silver-Using  Countries,  etc.,  1904. 

4  Int.  Exch.  Com.,  Rep.  1903,  p.  33. 


CURRENCY  COMMISSIONS  497 

China  to  adopt  a  gold  standard,  nor  did  they  succeed  in 
inducing  the  various  countries  to  buy  their  silver  with  such 
regularity  as  to  bring  about  any  appreciable  results  in 
permanently  steadying  the  price  of  the  white  metal; 
although  as  to  the  wisdom  of  such  a  policy  they  reported 
there  was  agreement  in  each  capital  at  which  the  subject 
was  considered  except  in  Paris.1 

Mexican  Monetary  Commission 

On  February  4,  1903  President  Diaz,  through  Finance 
Minister  Limantour,  appointed  a  Commission  of  44  persons 
to  investigate  monetary  conditions  in  Mexico ;  and  to  re- 
port a  plan  of  reform,  if  changes  in  the  monetary  system 
should  be  found  to  be  desirable.2 

The  Commission  met  on  February  19  and  organized  for 
work.  Pablo  Macedo  was  elected  President;  Enrique 
Creel,  Vice  President;  Louis  G.  Labastida,  Secretary; 
and  Jaime  Gurza,  Pro-secretary.  Upon  authorization  by 
the  Commission,  President  Macedo  appointed  four  sub- 
commissions  of  ten  members  each  "to  study  and  report 
upon  the  four  chief  points  of  the  questionnaire  formulated 
by  the  Finance  Minister,''  reserving  until  later  the  naming 
of  a  fifth  subcommission,  if  needed,  to  take  part  in  the 
deliberations  of  the  other  subcommissions,  furnish  them 
data,  and  integrate  their  work.3  Each  subcommission  was 
free  to  organize  its  work  as  it  saw  fit.  Any  member  was 
authorized  to  submit  to  the  subcommissions  or  to  the 
Commission  his  opinions  or  votes  in  writing,  or  to  have 
them  inserted  in  the  report.  The  expression  of  individual 
opinion  was  encouraged  by  the  Executive.  Sessions  were 
to  be  private,  only  such  outsiders  being  permitted  to  at- 
tend as  were  invited  to  assist. 

1  Ibid.,  p.  34. 

2  Com.  Mon.  Mex.,  Actas,  etc.,  pp.  1-4. 
8  Ibid.,  pp.  5-6. 

2K 


498         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

The  work  assigned  to  the  four  subcommissions  respec- 
tively may  be  summarized  as  follows : 

First  Subcommission.  This  sub  commission  was  charged 
with  the  collection  of  detailed  and  reliable  data  concerning 
the  importation  of  foreign  commodities ;  the  exportation  of 
Mexican  commodities;  the  amount  of  foreign  capital  in- 
vested in  Mexico,  both  temporarily  and  permanently; 
the  amount  of  profits  in  interest,  dividends,  or  other  forms, 
which  were  annually  remitted  to  foreign  countries  on  the 
account  of  temporary  or  permanent  foreign  investments 
in  Mexico;  and  the  amount  of  the  net  annual  balance 
against  Mexico.1 

Second  Subcommission.  The  work  assigned  to  the  second 
subcommission  was  concerned  with  the  collection  of  in- 
formation relating  to  the  mining  industry  in  Mexico,  with 
particular  reference  to  silver  mining.  Among  the  sub- 
jects to  be  investigated  were :  mineral  production  of  Mexico, 
including  amounts  and  quality  of  metals  produced,  and 
their  territorial  distribution ;  profits  in  mining  enterprises, 
expenses  of  mining  and  refining,  including  an  investigation 
of  the  number  of  laborers,  their  wages,  and  the  cost  of 
supplies,  especially  of  supplies  imported  from  gold  standard 
countries ;  and  the  advantages  and  disadvantages  resulting 
to  mining  properties  from  the  fall  in  the  price  of  silver. 

Third  Subcommission.  The  work  assigned  to  the  third 
subcommission  is  best  summarized  by  the  questions  which 
it  undertook  to  answer.  They  were : 2 

1.  What  is  the  amount  and  character  of  the  metallic 
money  in  circulation  in  Mexico  ? 

2.  What  is  the  direction  of  the  monetary  currents  be- 
tween the  different  parts  of  Mexico,  and  what  are  the  costs 
and  customary  methods  of  transporting  money  ? 

3.  Are  the  various  kinds  of  metallic  money,  and  the 

1  Com.  Mon.  Mex.,  Actas,  etc.,  pp.  17-18,  145-56. 

2  Ibid.,  p.  122, 


CURRENCY  COMMISSIONS  499 

various  denominations  of  bank  notes  which  can  be  legally 
circulated,  properly  adjusted  to  the  needs  of  the  country  ? 
4.   Is  there  any  periodicity  in  the  increase  or  decrease  in 
the  number  of  the  principal  classes  of  population  in  the 
Republic  ?     If  so  : 

(1)  What  are  the  causes  of  this  periodicity  ? 

(2)  What  are  its  principal  effects  upon : 

A.  Bank  discount ? 

B.  Commerce? 

C.  Agriculture? 

D.  Industry  ? 

E.  Other  transactions  in  general  ? 

Fourth  Subcommission.  The  program  of  the  fourth 
subcommission  was  likewise  outlined  in  the  form  of  ques- 
tions. They  were : 1 

1.  Has  the  rise  in  exchange  protected  and  stimulated 
national  production,  and,  if  so,  has  this  protection  been 
beneficial  equally  to  producers  and  consumers  ? 

2.  What  are  the  effects  of  the  rise  in  exchange  upon  the 
bringing  of  foreign  capital  into  Mexico  ? 

3.  Is  there  a  limit  beyond  which  the  continual  decline 
in  the  gold  price  of  silver  or  the  rise  in  exchange  will  cease  to 
benefit  national  production  and  come  to  have  disastrous 
effects  upon  both  producing  and  consuming  classes? 

4.  What  effects  has  the  continual  fluctuation  in  foreign 
exchange  rates  had  upon  all  branches  of  public  wealth,  and 
especially  upon  commerce,  the  banks,  and,  in  consequence, 
upon  the  money  market,  and  in  general  upon  all  national  in- 
terests? 

5.  Would  it  be  possible  to  establish  a  more  stable  value 
relation  between  our  monetary  unit  and  the  different  mone- 
tary units  of  the  foreign  countries  with  which  Mexico  has 
commercial  relations? 

The  findings  of  the  first,  second,  and  third  subcommissions 
need  not  be  summarized  here.  They  will  be  found  in  full 

1  Ibid.,  pp.  67-112, 


500         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

in  the  Monetary  Commissions's  volume  on  Actas  de  las 
Juntas  Generates,  to  which  frequent  reference  has  been  made. 
Considering  the  limited  time  available  for  the  subcom- 
missions '  work,  and  the  extreme  difficulty  in  a  country  like 
Mexico  of  collecting  data  of  this  character,  the  work  was 
well  done.  The  student  of  Mexican  monetary  problems 
is  largely  dependent  for  his  economic  facts  upon  the  data 
gathered,  organized,  and  corrected  by  these  subcommis- 
sions.  This  material  has  already  been  extensively  utilized 
in  the  present  paper  and  is  drawn  upon  liberally  in  the  dis- 
cussion which  follows. 

Conclusions  of  the  Fourth  Subcommission.  From  the 
standpoint  of  the  study  of  the  principles  underlying  the 
Mexican  monetary  reform  the  report  of  the  fourth  sub- 
commission  is  the  most  valuable.  It  covers  46  folio  pages,1 
and  its  principal  conclusions  are  summarized  as  follows : 

1.  That  [during  the  period  of  rising  exchange]  national 
agriculture  and  cattle  raising  have  progressed,  increasing 
their  production  of   articles  of   exportation  and   of  home 
consumption. 

2.  That  industries  of  every  class  have  improved  their 
condition,  and  new  industries  have  been  established ;  and 
that  prosperity  has  arisen  not  only  for  those  who  labor 
with  raw  materials  of  home  production,  but  also  for  those 
who  labor  with  raw  materials  of  foreign  production  and  with 
raw  materials  of  home  and  foreign  production  combined. 

3.  That  the  industry  of  land  transportation,  although  it 
has  received  increasing  gross  and  net  profits  per  mile,  in 
terms  of  silver,  has  suffered  a  diminution  in  its  net  profits 
per  mile  in  terms  of  gold. 

4.  That  the  production  of  the  country's  argentiferous 
mines  has  been  increasing  despite  the  effects  which  the 
advance  in  exchange  rates  would  have  been  expected  to 
have ;  and  that  this  advance  has  developed  in  an  extraordi- 
nary manner  the  production  of  minerals  containing  gold, 
copper,  and  lead. 

1  Com.  Mon.  Mex.,  Actas,  etc.,  pp.  67-113. 


CURRENCY  COMMISSIONS  501 

5.  That  there  has  been  an  enormous  increase  in  the 
prices  of  articles  produced  abroad,  since  the  fall  abroad  in 
the  gold  prices  of  these  articles  has  not  been  sufficient  to 
counterbalance  the  results  of  the  rise  in  exchange. 

6.  That  rural  and  urban  real  estate  has  increased  in 
price,  partly  by  reason  of  the  depreciation  of  the  peso, 
partly  by  reason  of  the  building  of  railroads,  and  partly 
by  reason  of  the  purchase  of  lands  opened  for  cultivation. 

7.  That  wages  and  salaries  of   the  consuming  classes 
have  scarcely  been  affected,  continuing  with  very  slight  ex- 
ceptions the  same  as  they  were  before  the  decline  in  silver. 

The  fourth  subcommission,  in  view  of  the  results  ob- 
tained, concluded  that,  although  it  was  clear  that  the  rise 
in  exchange  had  protected  and  stimulated  national  produc- 
tion, these  benefits  had  been  effected  at  the  expense  of  the 
consuming  classes.  The  producing  classes  of  the  country, 
it  said,  moved  by  sincere  sentiment  have  applauded  each 
new  advance  in  foreign  exchange  rates,  because  under  the 
protection  of  this  advance  they  have  obtained  greater  pros- 
perity. On  the  other  hand,  it  said  that  "every  advance 
in  foreign  exchange  rates  imposes  an  increasing  burden 
upon  the  laboring  classes,  and,  in  general,  upon  all  con- 
sumers who  receive  a  salary  or  a  daily  wage."  1 

Foreign  capitalists  who  had  invested  in  the  country,  the 
fourth  subcommission  found,  had  suffered  considerable 
losses,  although  in  terms  of  silver  there  were  apparent  gains. 
It  declared  its  belief 

"that  any  measure  that  could  be  taken  to  change  this  con- 
dition of  affairs  and  offer  a  guaranty  of  stability  to  foreign 
capitalists,  would  be  extremely  beneficial  to  the  national 
interests,  since  nothing  could  contribute  so  much  to  the 
development  of  national  wealth  as  an  increasing  investment 
of  capital,  and  it  is  only  from  abroad  that  capital  can  come 
in  abundance.2 

i  Ibid.,  p.  88.  a  Ibid.,  p.  89. 


502         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

The  subcommission  expressed  its  strong  conviction  that 
in  no  case  would  national  production  permanently  be  bene- 
fited by  a  continual  decline  in  the  gold  price  of  silver,  and 
that  there  would  always  be  a  limit,  "beyond  which  such  a 
decline  would  turn  into  disaster  for  the  producing  and  con- 
suming classes  of  the  Republic  such  beneficial  effects  as 
the  decline  up  to  the  present  time  has  produced."  : 

The  belief  was  emphatically  expressed  that  no  one  thing 
had  caused  greater  disturbance  and  harm  to  the  Republic 
than  the  continual  fluctuation  in  foreign  exchange  rates ; 2 
and  the  subcommission  declared  it  to  be  its  opinion  "with- 
out a  moment's  hesitation"  that  Mexico  should  procure 
"the  greatest  possible  stability  in  the  exchange  relation  of 
its  money  and  the  money  units  of  the  foreign  countries 
with  which  it  cultivates  commercial  relations."  3 


The  Work  of  the  Fifth  Subcommission 

When  the  four  subcommissions  had  made  their  reports, 
a  fifth  subcommission  was  created  to  devise  definite  recom- 
mendations for  monetary  reform  and  to  plan  ways  and 
means  for  carrying  them  into  execution.  This  fifth  sub- 
commission  consisted  of  the  chairman  of  the  Commission, 
the  general  secretary,  and  the  chairmen  and  secretaries 
of  the  other  four  subcommissions.  The  vice  president, 
Enrique  C.  Creel,  and  the  pro-secretary  attended  the  ses- 
sions of  the  fifth  subcommission  and  took  an  active  part 
in  the  discussions,  thus  making  a  de  facto  subcommis- 
sion of  twelve  members.4  A  plan  of  work  was  drawn  up 
covering  four  broad  subjects,  and  each  subject  was  as- 
signed to  a  subcommittee  of  two  or  three  members.  The 
four  subjects  were  stated  in  the  form  of  questions,  and  each 

1  Com.  Mon.  Mex.,  Actas,  etc.,  p.  90. 

2  Ibid.,  p.  93. 
1  Ibid.,  p.  94. 
4  Ibid.,  p.  158. 


CURRENCY  COMMISSIONS  503 

question  was  subdivided   into   a   number  of    subsidiary 
questions.1    Below  are  given  the  four  main  questions : 

1.  What  is  the  monetary  system  whose  adoption  should 
be  recommended  to  the  Government? 

2.  What  transitional  measures  should  be  adopted  in 
order  to  put  into  force  the  system  recommended? 

3.  What  measures  should  be  adopted  in  order  to  obtain 
stability  in  the  international  exchanges,  upon  the  tentative 
assumption  that  the  ratio  to  be  adopted  between  gold  and 
silver  shall  be  32  to  i  ? 

4.  Shall  the  adoption  of  special  measures  be  rec6m- 
mended,  as  for  example  the  abolition  or  reduction  of  taxes 
or  other  dues,  in  order  to  relieve  not  only  the  silver  mines 
but  export  industries  in  general,  of  the  burdens  which  might 
otherwise  be  imposed  upon  them  by  the  monetary  reform  ? 

Upon  all  these  questions  but  the  third,  with  its  various 
ramifications,  there  was  substantial  agreement.  Upon  the 
third  question,  however,  which  centered  in  the  query 
whether  or  not  a  gold  reserve  fund  should  be  established  and 
used  from  the  beginning,  there  was  a  sharp  difference  of 
opinion  —  a  difference  which  could  not  be  reconciled  by 
extended  debates,  and  which  finally  found  expression  in  a 
majority  and  a  minority  report.  Leaving  the  subject  of 
the  reserve  fund  until  later,  we  may  here  consider  briefly 
the  subcommission's  recommendations,  which  later  became 
the  recommendations  of  the  Monetary  Commission,  on  the 
other  important  topics  covered  by  the  subcommission's 
deliberations. 

Recommends  Abandonment  of  Silver  Standard.  There 
was  only  one  dissenting  vote  2  to  the  proposition  that  the 
Mexican  mints  should  be  closed  to  the  free  coinage  of  silver 
on  private  account. 

Favors  a  New  Silver  Peso  and  New  Fractional  Coins. 
Upon  the  question  as  to  whether  a  new  silver  peso  should 

1  For  the  complete  program  of  the  fifth  subcommission's  labors,  see  ibid., 
pp.  158-59. 

2  This  was  the  vote  of  J.  de  Landero  y  Cos.     See  ibid.,  p.  187. 


504         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

be  coined  or  the  existing  peso  continued  and  put  upon  a 
gold  basis,  there  appears  to  have  been  some  discussion,  but 
the  opinion  of  the  subcommission  was  strongly  in  favor 
of  a  new  peso.  Of  course  the  continuance  of  the  old  peso 
would  have  been  cheaper,  and  there  was  much  sentiment  in 
Mexico  in  its  favor.  As  pointed  out  at  the  beginning  of  this 
paper,  billions  of  these  pesos  had  been  coined,  and  they  had 
carried  the  name  of  Mexico  upon  "an  honest  dollar"  into 
the  marts  of  nearly  every  section  of  the  world.  At  this 
time,  however,  the  Mexican  peso  was  rapidly  disappearing 
as  a  coin  in  foreign  countries.1  Its  designs  were  not 
artistic,  and  the  coins  were  easy  to  counterfeit.  None  the 
less  it  had  been  thought  impracticable  materially  to  alter 
them,  since  to  do  so  would  endanger  the  acceptability  of 
the  coins  among  orientals.  Moreover,  the  Mexican  peso 
circulating  in  Mexico  in  the  future  was  to  be  a  fiduciary  coin 
circulating  at  a  gold  value  substantially  above  its  bullion 
value ;  and  if  the  old  pesos  were  continued  in  circulation,  it 
was  thought  that  there  would  be  grave  danger  that  large 
quantities  of  them  would  be  smuggled  in  from  the  Orient 
to  take  advantage  of  their  monopoly  value  in  Mexico.2  Ac- 
cordingly the  fifth  subcommission  recommended  the  tem- 
porary suspension  of  the  coinage  of  Mexican  pesos,  and 
the  prohibition  of  their  importation  into  Mexico.  As  a 
substitute  for  the  old  peso  in  circulation  it  proposed  the 
coinage  of  a  new  peso  of  the  same  fine  silver  content  as 
the  old  one  but  with  a  millesimal  fineness  of  .900  instead  of 
.90278. 

Fractional  silver  coins  of  the  denominations  of  50  cents,  20 
cents,  and  10  cents,  and  suitable  minor  coins  of  5  cents  and 
i  cent  were  recommended.  These  fractional  silver  coins 
were  to  be  .800  fine  and  all  were  to  weigh  25  grams  gross  to 
the  peso.  They  were,  therefore,  unlike  the  old  fractional 

1  See  Andrew,  The  End  of  the  Mexican  Dollar,  in  Quart.  Journ.  Econ., 
XVIII,  1904,  pp.  321-56. 

2  Cf.  Com.  Mon.  Mex.,  Actas,  etc.,  pp.  161-62. 


CURRENCY  COMMISSIONS  505 

silver  coins,  to  be  of  lighter  proportionate  weights  than  the 
peso  and  of  a  lower  millesimal  fineness.  Upon  this  basis 
a  peso  in  fractional  coins  would  contain  approximately  18 
per  cent  less  pure  silver  than  the  peso  piece  —  a  good  in- 
surance margin  for  the  fractional  coins  in  case  a  rise  in  the 
price  of  silver  should  threaten  the  peso  pieces  with  the 
melting  pot.1 

Favors  Indian  Plan  for  Attainment  of  Gold  Standard. 
As  the  fundamental  basis  for  the  new  monetary  system 
the  fifth  subcommission  recommended  a  fixed  parity 
between  gold  and  silver,  the  value  of  the  gold  unit  to  be 
based  upon  the  average  gold  price  of  the  Mexican  peso  in 
foreign  markets  during  the  preceding  ten  years,  with  an 
agio  not  to  exceed  ten  per  cent.2  It  recommended  that  the 
gold  coins  when  minted  should  be  .goo  fine,  and  that  an 
effort  should  be  made  to  assimilate  the  unit  with  some 
important  foreign  monetary  unit,  preferably  the  American 
dollar  —  a  recommendation  which  meant  that  the  monetary 
unit  should  be  made  as  nearly  as  practicable  the  equivalent 
of  50  cents  United  States  gold.  Both  gold  and  silver  pesos 
were  to  be  unlimited  legal  tender,  while  fractional  silver 
coins  were  henceforth  to  be  legal  tender  only  in  limited 
amounts.3 

The  majority  of  the  fifth  subcommission  declared  that 
there  were  many  reasons  why  the  Republic  should  not  go  at 
once  to  the  gold  basis  with  gold  coin  in  circulation.  The 
two  chief  ones  were:  (i)  Although  Mexico  produced  21.9 
millions  kilograms  of  gold  during  the  fiscal  year  1903,  all 
of  that  production  had  been  exported,  and  therefore,  in 
order  to  get  gold  for  monetary  circulation,  it  would  be  neces- 
sary for  the  Government  to  buy  it  in  the  open  market, 
and  this  would  impose  a  heavy  financial  sacrifice  upon 
the  country.  (2)  Mexico,  being  one  of  the  largest  silver- 

1  Cf.  infra,  pp.  538-42. 

2  Com.  Mon.  Mex.,  Actas,  etc.,  p.  201. 

3  Ibid.,  p.  202. 


506         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

producing  countries  in  the  world,  was  interested  in  the 
maintenance  of  the  value  of  the  white  metal,  and  for  her 
to  adopt  outright  the  gold  standard  with  gold  coins  in 
circulation  would  be  to  accentuate  the  decline  in  the 
price  of  silver ;  first,  because  of  the  moral  effect  it  would 
produce  upon  the  weak  and  highly  sensitive  silver  market ; 
and  second,  because  substantial  sums  of  silver  would  have 
to  be  withdrawn  from  circulation  in  Mexico  within  a  short 
time,  and  the  country's  monetary  demand  for  silver  would 
be  reduced  in  the  future.1 

Throughout  the  transitional  period  no  gold  was  to  be 
coined.  Although  there  was  some  difference  of  opinion 
upon  this  subject, 2  the  majority  reasoned  that,  if  free 
coinage  of  gold  were  permitted,  either  gold  would  be  brought 
to  the  mint  for  coinage  or  it  would  not ;  in  the  latter  case, 
the  privilege  would  be  of  no  account ;  in  the  former,  the 
introduction  of  new  gold  coins  into  circulation  would  inter- 
fere with  the  relative  contraction  of  the  currency  which 
was  looked  upon  as  the  sine  qua  non  for  raising  the  value 
of  the  silver  pesos  to  the  new  gold  par.3 

The  Question  of  Justice  between  Debtor  and  Creditor.  The 
question  of  justice  in  the  settlement  of  preexisting  contracts 
between  debtor  and  creditor,  after  the  new  unit  of  value 
should  be  substituted  for  the  old,  was  considered  by  the  fifth 
subcommission  in  connection  with  the  proposal  to  redeem 
the  old  currency  in  the  new  at  a  discount.  On  this  subject 
the  majority  said : 

"  The  point  of  view  of  justice  in  the  relations  between  debtors 
and  creditors  is  also  important.  It  is  clear  that  debtors 
in  paying  old  debts  at  par  in  the  new  peso  which  has  a 

1Com.  Mon.  Mex.,  Actas,  etc.,  p.  188. 

2  Cf.  opinion  of  Joaquin  D.  Casasus.  Ibid.,  pp.  173  and  181.  Mr.  Casasus's 
dissenting  opinions  are  very  able.  He  was  chairman  of  the  fourth  subcom- 
mission and  a  member  of  the  fifth  subcommission.  His  writings  and  the 
report  of  the  fourth  subcommission  have  been  republished  in  both  Spanish 
and  English  in  a  volume  entitled  La  Reforma  Monetaria  en  Mexico. 

8  Com.  Mon.  Mex.,  Actas,  etc.,  p.  197. 


CURRENCY  COMMISSIONS  507 

greater  value  in  gold  for  commodities  in  international  trade 
will  be  giving  a  coin  of  better  quality,  and  therefore  one  held 
in  greater  esteem,  than  the  old  one,  and  that  as  a  result 
creditors  pro  tanto  will  be  benefited.  It  must  not  be  for- 
gotten, however,  that  for  the  great  majority  of  debtors  and 
creditors,  the  better  quality  of  the  new  coin  will  be,  so  to 
speak,  neither  tangible  nor  appreciable,  since  they  have 
nothing  to  do  directly  either  with  the  exchanges  nor  with 
international  trade.  They  would,  therefore,  understand 
with  much  difficulty,  if  they  understood  at  all,  the  reason 
for  the  discount  on  the  old  coins  ;  and  in  the  meantime  credi- 
tors (and  who  is  not  a  creditor  at  least  for  a  small  salary  or  a 
petty  wage?)  would  complain  of  an  injustice  irritating  be- 
cause inexplainable.  .  .  . 

"  It  will  not  be  overlooked  in  truth  by  the  enlightened  and 
cultured  part  of  the  nation,  that  in  time  there  will  result  a 
reduction  in  the  cost  of  living ;  .  .  .  but  at  first  there  will 
be  no  such  reduction,  if  one  may  judge  by  the  universal 
experience  of  other  countries,  in  salaries  or  wages  —  a 
situation  which  incidentally  will  benefit  the  disinherited 
classes.  Moreover,  the  reduction,  coming  as  it  will  as  the 
result  of  competition  and  not  of  impoverishment,  will 
come  slowly,  and  under  conditions  which  will  not  be 
disturbing  to  any  one,  since  the  old  debts  will  have  been 
slowly  liquidated.1 

In  the  interpretation  of  this  recommendation  of  "a  let 
alone  policy"  as  regards  existing  contracts,  and  of  the  ultra 
optimistic  reasoning  by  which  it  was  supported,  the  reader 
will  observe  that  such  a  policy  was  more  easily  justified 
in  Mexico  than  it  was  in  the  Straits  Settlements  currency 
reform,2  or  than  it  would  have  been  in  that  of  the  Philippine 
Islands.3  A  reference  to  the  chart  (page  535)  will  show  that 
in  the  fall  of  1903,  when  the  Mexican  Monetary  Commis- 
sion was  deliberating,  the  bullion  value  of  the  peso  rose  to 
a  maximum  of  over  49  cents  (United  States  currency) ; 
so  that  the  margin  between  the  peso's  "natural  value" 

1  Ibid,  p.  199.     a  Cf.  supra,  pp.  433~39-     8  Cf.  supra,  p.  339. 


508         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

shortly  before  the  reform  was  expected  to  be  inaugurated 
and  the  gold  value  to  which  it  was  ultimately  to  be  raised 
by  relative  contraction  was  a  very  small  one.  The  small- 
ness  of  this  margin,  the  length  of  time  which  it  was  ex- 
pected would  be  required  to  raise  the  peso  to  its  gold  par, 
and  the  wide  fluctuations  in  the  gold  value  of  the  peso  to 
which  the  country  had  long  been  accustomed,  coupled  with 
the  reasons  above  cited  by  the  fifth  subcommission,  appear 
to  be  sufficient  justification  for  the  failure  to  recommend 
the  adoption  of  any  plan  to  secure  greater  justice  for  the 
debtor  by  authorizing  settlements  in  the  new  currency 
according  to  some  plan  of  discounts  based  upon  what  the 
value  of  the  old  peso  probably  would  have  been  had  the 
currency  reform  not  been  inaugurated. 

Other  Transitional  Matters.  According  to  the  fifth  sub- 
commission's  recommendations,  the  National  Government 
was  to  take  reasonable  action  "to  obviate,  or  at  least  to 
mitigate,  the  temporary  loss  or  harm  that  may  accrue  to 
some  of  the  interests  connected  with  silver  mining  and  the 
industries  that  produce  articles  for  exportation,  as  a  conse- 
quence of  the  stabilization  of  exchange."  1 

In  order  to  expedite  the  recoinage,  and  to  free  the  Govern- 
ment from  the  necessity  of  buying  silver  with  which  to  start 
coining  the  new  money,  it  was  recommended  that  the 
banks  be  authorized  to  substitute  in  their  vaults,  for  a  part 
of  their  legal  metallic  reserve,  special  exchange  certificates 
to  be  issued  by  the  Government,  thereby  releasing  for  re- 
coinage  a  continuing  fund  represented  by  the  amount  of 
the  certificates.2 

The  Question  of  a  Gold  Reserve 

Upon  the  essentials  of  the  above  recommendations,  and 
some  minor  ones  not  mentioned  here  which  can  best  be 

1  Com.  Mon.  Mex.,  Actas,  etc.,  p.  203. 

2  Ibid.,  p.  198.    A  similar  recommendation  was  made  by  the  minority. 
Ibid.,  pp.  186-87. 


CURRENCY  COMMISSIONS  509 

considered  in  connection  with  the  subsequent  legislation, 
the  members  of  the  fifth  subcommission  were  nearly  unani- 
mous. We  now  come  to  the  question  of  the  immediate 
establishment  and  use  of  a  substantial  gold  reserve,  the 
crucial  question  upon  which,  with  its  related  questions, 
the  opinion  of  the  Commissioners  was  strongly  divided. 
Into  the  details  of  this  long  and  ably-conducted  controversy 
we  cannot  go.  It  will  be  sufficient  to  state  the  recom- 
mendations of  the  majority  and  those  upon  which  there 
was  widest  agreement  among  the  minority,  and  to  give  a 
brief  summary  of  the  principal  reasons  advanced  in  sup- 
port of  each  plan. 

The  majority  (i.e.,  7  members)  of  the  fifth  subcommission 
recommended :  that  as  soon  as  the  Government  should  have 
in  readiness  enough  of  the  new  coins  to  begin  putting  them 
in  circulation,  it  should  direct  that  they  be  given  out  in 
exchange  for  such  of  the  old  coins  as  were  legally  circulat- 
ing in  the  country.  The  exchange  was  to  be  effected  at 
par  at  as  large  a  number  of  places  as  possible  so  as  to  ac- 
complish the  conversion  in  the  shortest  possible  time  and 
to  minimize  public  inconvenience.1  The  Government  was 
to  put  into  circulation  only  such  an  amount  of  the  new 
pesos  as  should  be  necessary  for  the  redemption  of  the  old 
money ;  and  care  was  to  be  taken  to  prevent  any  excessive 
issue  of  fractional  money. 

"  When  the  exchange  shall  have  been  effected,  the  Govern- 
ment shall  not  place  in  circulation  any  additional  silver 
pesos,  without  receiving  in  Mexico  or  abroad  the  equivalent 
in  gold  bars  or  gold  coin  at  the  established  ratio,  plus  an 
additional  amount  sufficient  to  cover  transportation,  in- 
surance, and  other  expenses,  if  the  delivery  is  made  outside 
of  the  Republic." ! 

1  Redemption  at  a  discount,  it  was  reasoned,  would  involve  the  Govern- 
ment in  a  moral  obligation  to  redeem  the  new  coins  in  gold  —  an  obligation 
which  the  majority  did  not  think  should  be  assumed  at  that  time.  Cf .  ibid., 
p.  199.  2Ibid.,  p.  202. 


510         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

While  recommending  that  the  Government  begin  to  ac- 
cumulate a  reserve  out  of  surpluses  and  profits  accruing 
from  the  minting  of  the  new  coins,  the  majority  were  op- 
posed to  the  Government's  incurring  any  obligation  what- 
ever for  the  redemption  of  the  new  money  in  gold.  Their 
plan  was  the  Indian  plan  of  relative  contraction,  whereby 
they  hoped  to  raise  the  gold  value  of  the  peso  from  bullion 
value  to  the  new  gold  par;  i.e.,  from  an  equivalent  of  43 -J 
cents  United  States  currency  on  December  u,  1903,  when 
their  report  was  dated,  to  50  cents,  or  an  increase  of  15^  per 
cent. 

"In  principle/'  they  said,  "no  attempt  ought  to  be  made 
to  bring  about  brusquely  and  without  a  transition  period, 
by  direct  action  of  the  Government,  the  legal  parity  be- 
tween gold  and  the  silver  peso.  Private  interests,  which 
of  necessity  will  be  affected  by  the  new  monetary  system, 
though  temporarily,  should  be  given  an  opportunity  to 
adjust  themselves  to  it  gradually  and  spontaneously."  1 

On  this  vital  point  of  the  disagreement,  however,  the 
majority  wavered,  for  they  declared : 

"Notwithstanding  what  has  just  been  said,  if  the  mere 
closing  of  the  mints,  and  the  other  general  measures  which 
the  Government  may  adopt  in  the  direction  above  outlined, 
shall  prove  inadequate,  and  if  the  attainment  of  the  legal 
parity  between  the  gold  and  the  silver  peso  shall  be  delayed 
longer  than  the  Government  judges  prudent  under  the  cir- 
cumstances :  then  the  surest  means  for  bringing  about  that 
parity  will  consist  in  increasing  the  amounts  paid  into  the 
reserve  fund  by  a  sum  sufficient  to  influence  the  interna- 
tional exchanges  in  the  home  .market.  .  .  ."2 

This  influence  was  to  be  exercised  through  the  machinery 
of  a  gold-exchange  standard.  Referring  to  the  above  con- 
tingency, the  majority  said : 

1  Com.  Mon.  Mex.,  Actas,  etc.,  p.  203.  J  Ibid.,  p.  203. 


CURRENCY  COMMISSIONS  511 

"The  object  of  the  reserve  fund  is  the  sale,  when  deemed 
advisable,  of  gold  drafts  on  foreign  countries  to  satisfy 
the  needs  of  international  exchange,  at  rates  that  will  im- 
prove the  rates  in  the  Republic's  home  market,  with  the 
constant  aim  of  establishing  gradually  the  legal  parity 
between  gold  and  silver  pesos,  or  of  maintaining  this  parity 
when  once  it  has  been  established. "  1 

The  foreign  drafts  were  to  be  paid  for  cash  down  in  silver 
pesos,  which  were  to  be  placed  in  the  reserve  fund  and  not 
to  be  paid  out  again  except  against  gold  deposited  to  the 
credit  of  the  reserve  fund  either  at  home  or  abroad. 

The  Minority  Report.  The  report  of  the  minority  of  the 
fifth  subcommission  favoring  the  establishment  of  a  gold 
reserve  fund  was  signed  by  four  members,2  and  to  their 
plan  a  fifth*  member  subscribed  with  the  qualification  that, 
though  opposed  to  the  monetary  reform,  he  was  in  accord 
with  the  general  features  of  the  minority  project,  if  the 
reform  were  to  be  made. 

Of  the  minority  plan  the  chief  features  were  as  follows : 
A  reserve  fund  amounting  to  30  per  cent  of  the  sum  of  the 
new  coins  which  were  to  be  issued  (i.e.,  a  reserve  of  about 
P  40,000,000)  was  to  be  established,3  part  of  which  was  to  be 
kept  in  Mexico  and  part  abroad.  The  reserve  fund  was  to 
be  accumulated  gradually  during  the  period  of  transition, 
which  in  no  case  was  to  exceed  three  years.  It  was  to  be 
a  trust  fund,  separate  from  other  government  funds,  and  ad- 
ministered by  a  special  commission.  During  the  transition 
period  the  reserve  was  to  be  used  to  aid  the  gradual  raising 

1  Ibid.,  p.  203. 

2  Ibid.,  pp.  182-87. 

8  This  reserve  was  to  be  obtained  from  four  sources :  (i)  Extraordinary 
sources,  either  the  nation's  treasury  reserves  or  the  proceeds  of  a  loan  of  a 
transitory  nature ;  (2)  Seigniorage  profits  on  the  new  coinage ;  (3)  Interest 
received  from  deposits  in  banks  at  home  and  abroad ;  (4)  Three  per  cent  of 
the  import  duties  which  ought  to  be  paid  in  gold,  at  the  legal  parity,  this 
sum  to  be  utilized  for  the  amortization  of  the  debt  contracted,  if  it  should 
become  necessary  to  have  recourse  to  a  loan  for  the  creation  of  the  reserve 
fund.  Ibid.,  p.  186. 


512        THE  MEXICAN  CURRENCY  REFORM,   1903-08 

of  the  gold  value  of  the  peso  by  the  sale  of  drafts  on  that 
part  of  the  fund  located  in  foreign  countries,  until  exchange 
rates  on  New  York  and  other  foreign  places  should  reach 
the  legal  parity  plus  2  per  cent;  thereafter  the  fund  was 
to  be  used  to  maintain  stable  international  exchange  rates 
at  this  level  through  the  mechanism  of  the  gold-exchange 
standard.1 

Arguments  Advanced  by  Majority.  In  support  of  their 
"let  alone"  plan  of  relative  contraction  without  the  im- 
mediate use  of  a  reserve  fund,  the  majority  offered  the 
following  line  of  argument : 2  The  closing  of  the  mints  to  the 
free  coinage  of  silver  and  also  of  gold  would  place  a  positive 
limitation  upon  the  currency  supply. 

"Following  this  principle  of  limiting  the  quantity  of 
money,  a  principle  which  in  our  judgment  is  demonstrated 
by  the  experience  of  all  nations,  and  established  by  the 
teachings  of  economists,  it  is  possible  to  disassociate  the 
value  of  silver  coins  from  their  mere  bullion  value,  and  even 
to  raise  them,  in  comparison  with  gold,  to  the  level  of  value 
established  by  law;  provided  only  that  the  quantity  of 
money  in  circulation  be  proportionate  to  the  demand, 
or,  in  other  words,  that  the  quantity  of  money  be  not 
excessive,  in  relation  to  the  needs  which  it  is  destined  to 
satisfy.  But  what  are  these  needs  in  the  case  of  a  given 
nation  or  people  ?  We  believe  that  theoretically  they  are 
almost  impossible  to  determine,  since  they  depend  upon 
causes  complex  and  variable  beyond  measure,  such  as  the 
number  and  character  of  the  transactions  into  which  money 
enters,  the  coefficient  of  rapidity  of  monetary  circulation, 
which  in  a  large  degree  depends  upon  the  greater  or  less 
extent  to  which  credit  instruments  in  their  manifold  forms 
are  employed,  the  degree  of  wealth  and  enlightenment  of 
the  mercantile  community  and  of  the  people  in  general,  and 
even  the  inclinations  and  preferences  of  people  which  are 
often  unknown  and  for  which  even  when  known,  it  is  not 
easy  always  to  assign  a  satisfactory  and  rational  explana- 

1  Com.  Mon.  Mex.,  Actas,  etc.,  p.  186.  2  Ibid.,  pp.  187-201. 


CURRENCY  COMMISSIONS  513 

tion.  Experience  therefore  seems  to  be  the  only  norm  to 
follow  in  so  delicate  a  matter ;  and  this  is  especially  true 
in  the  case  of  Mexico,  since  we  lack  information  concerning 
the  most  elementary  facts  of  the  problem."  1 

The  conclusion  was  that  the  only  safe  course  to  follow 
at  the  beginning  was  to  close  the  mints  and  see  what  hap- 
pened, shaping  future  action  to  conditions  as  they  should 
develop.  It  was  admitted  that  a  reserve  fund  would  be 
the  most  efficacious  means  that  could  be  adopted  to  secure 
legal  parity  with  promptness;  but  this  very  promptness 
was  declared  to  be  the  greatest  drawback  of  the  plan  be- 
cause of  the  shock  it  would  give  to  business,  especially  the 
silver  industry  and  the  export  trade.  Time  was  needed  to 
make  possible  a  gradual  adjustment  to  the  new  conditions, 
and  this  would  be  given  only  by  the  slower  plan  of  relative 
contraction. 

The  suggestion  of  the  minority,  that  the  reserve  might  be 
used  to  bring  about  a  gradual  rise  in  the  value  of  the  peso 
with  a  certain  degree  of  prearranged  regularity,2  was 
characterized  as  very  dangerous,  since  it  would  place 
either  in  the  hands  of  the  government  authorities  or  in  a 
special  body  appointed  by  them  the  absolute  control  of 
the  exchange  market,  and  would  lead  to  ruinous  specula- 
tion in  foreign  exchange  for  a  rise  in  the  value  of  the  peso.3 

It  was  argued  further  that  the  establishment  of  such  a 
reserve  fund  would  increase  the  public  debt  and  be  un- 
popular ;  also  that  if  a  reserve  should  be  established  and,  as 
a  result  of  a  strongly  unfavorable  trade  balance,  its  amount 
should  prove  inadequate,  or,  of  equal  importance,  if  capi- 
talists should  fear  that  it  would  prove  inadequate,  there 
would  result  a  lack  of  confidence  in  the  reform  which 

1  Ibid.,  p.  190. 

2  Cf.  plan  adopted  in  England  in  1819  on  the  recommendation  of  Ricardo 
for  gradually  bringing  Bank  of  England  notes  back  to  par.    A.  Andreads, 
History  of  the  Bank  of  England,  p.  241 ;  also  A.  M.  Lindsay,  Ricardos  Ex- 
change Remedy,  pp.  5-8. 

*  Cf.  experience  of  the  Straits  Settlements  in  1905-06,  supra,  pp.  411-17. 

at 


514         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

would  drive  capital  out  of  the  country,  and  might  cause  the 
whole  reform  project  to  end  in  disaster. 

None  the  less,  as  we  have  seen,  the  majority  wavered, 
and  to  be  on  the  safe  side  recommended  that  the  legislative 
measures  to  be  passed  for  the  execution  of  the  reform  should 
include  the  giving  of  authority  to  the  Executive  to  create 
a  gold  reserve  fund,  should  subsequent  experience  indicate 
that  such  a  course  was  desirable.  This  recommendation 
the  majority  considered  merely 

"a  prudent  course,  like  that  of  a  commanding  general, 
who  considering  victory  sure  by  only  using  a  portion  of  his 
forces,  should  decide  not  to  bring  all  of  his  army  into  action, 
but  rather  to  hold  in  reserve  a  portion  of  it,  possibly  the 
best  portion,  in  order  to  be  ready  for  unexpected  emergen- 
cies, not  arrogantly  trusting  that  these  emergencies  would 
not  rise,  simply  because  he  could  not  foresee  them."  1 

Arguments  Advanced  by  Minority.  The  minority  believed 
the  plan  of  the  majority  to  be  dangerous,  weak,  and  vacillat- 
ing. While  they  did  not  doubt  that  the  value  of  the  peso 
could  ultimately  be  raised  by  relative  contraction  to  the 
legal  gold  par,  they  believed  that  the  process  would  be  a 
long  and  economically  painful  one,  as  had  been  the  ex- 
perience of  India  under  the  same  plan  between  1893  and 
iSgS,2  and  they  believed  that  the  vacillation  of  the  majority 
in  the  matter  of  the  reserve  fund  would  weaken  public  con- 
fidence in  the  reform  plan,  keep  foreign  capital  from  coming 
into  the  country,  and  in  other  ways  interfere  with  the  suc- 
cessful execution  of  the  plan.  Among  the  more  important 
specific  arguments  advanced  by  the  minority  or  by  in- 
dividuals signing  the  minority  report  the  following  may 
briefly  be  cited. 

In  Mexico  any  considerable  relative  contraction  of  the 
currency  would  be  accomplished  very  slowly,  and  even 

1  Com.  Mon.  Mex.,  Actas,  etc.,  p.  196. 

2  Cf.  supra,  pp.  35-69. 


CURRENCY  COMMISSIONS  515 

when  the  legal  parity  was  once  attained,  there  would  be 
for  a  long  time  a  danger  that  the  gold  value  of  the  peso 
would  again  decline  under  the  influence  of  recurring  strongly 
unfavorable  trade  balances.  The  minority  report  was  dated 
December  5,  1903.  A  reference  to  the  chart  (on  page  535) 
will  show  that  for  that  month  the  bullion  value  of  the 
Mexican  peso  varied  between  45.5  cents  and  43.1  cents 
United  States  currency,  the  range  for  November  having 
been  47.6  cents  to  45.2  cents,  and  that  for  October  49.1 
cents  to  47.3  cents.  The  tendency  therefore  appeared 
to  be  downward.  To  raise  such  a  peso  solely  by  relative 
contraction  to  a  5o-cent  level,  and  to  establish  it  there 
securely,  appeared  to  the  minority  a  slow  process.  The 
annual  coinage  of  silver  in  Mexico  was  large,  varying  from 
a  minimum  of  PiS.i  millions  to  a  maximum  of  P3O.2 
millions  during  the  twenty  years  1882-83  to  1901-02,  the 
average  being  P24.2  millions.  But  nearly  all  of  this  coin 
was  exported.  In  fact  for  three  years  of  the  period  the 
exports  exceeded  the  coinage,  and  for  the  twenty-year 
period  the  annual  exports  varied  from  Pio.9  millions  to 
P  27.2  millions,  the  average  being  P  19.6  millions.  This 
left  an  annual  average  net  increase  in  the  coin  circulation 
of  only  P4.6  millions,1  representing  approximately  3^  per 
cent  of  the  estimated  total  coin  in  circulation  (i.e.,  of  P 130 
millions).2  If  closing  the  mints  lessened  the  relative 
monetary  supply  only  by  this  small  amount  each  year, 
how  long,  the  minority  asked,  would  it  require  to  raise  the 

1  The  majority  claimed  that  this  figure  (or  more  correctly  the  P  5  millions 
cited  by  the  minority  as  the  average  annual  increase  for  the  past  25  years) 
was  an  understatement,  since  it  neglected  the  substantial  recent  annual  addi- 
tions to  the  net  bank-note  circulation,  which  had  been  during  the  preceding 
five  years,  1898-1903,  respectively,  in  millions  of  pesos  (round  numbers), 
n.8,  14.6,  15.0,  31.5,  and  28.9.    Cf.  Com.  Mon.  Mex.,  Actas,  etc.,  p.  194; 
also  Com.  Mon.  Mex.,  Estadlstica  Bancaria,  in  which  detailed  figures  for 
bank-note  circulation  by  months  since  1882  will  be  found.     But  cf.  infra, 
pp.  526-30. 

2  Cf.  memorandum  of  Joaquin  D.  Casasus,  in  Com.  Mon.  Mex.,  Actas, 
etc.,  p.  178. 


51 6         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

peso  to  the  new  gold  par  solely  by  rarefication.  But  this 
was  only  part  of  the  story.  Against  rarefication  three 
forces  would  continually  be  working:  (i)  a  tendency  for 
an  increasing  rate  of  monetary  turnover ;  (2)  an  ever  in- 
creasing use  of  credit  instruments  as  media  of  exchange ; 
and  (3)  the  inhibiting  effects  upon  business,  and  there- 
fore upon  the  growth  of  the  demand  for  exchange  media, 
resulting  from  the  depressing  influence  of  currency  contrac- 
tion. 

Among  the  positive  evils  of  such  a  long  drawn  out  tran- 
sition period,  the  advocates  of  a  gold  reserve,  having  ref- 
erence to  the  experience  of  India,  mentioned  high  and  rising 
interest  rates,  slowly  falling  prices,  slowly  increasing 
burdens  upon  the  export  trade  and  upon  silver  mining,  un- 
certainty in  all  lines  of  trade,  lack  of  confidence  in  the 
Government,  and  the  discouragement  of  the  investment 
of  foreign  capital  in  Mexico.1  They  also  laid  emphasis 
upon  the  fact  that  because  of  the  large  amount  of  foreign 
capital  invested  in  the  Republic  the  balance  of  trade  was 
normally  strongly  against  the  country,  and  that,  with  a 
fiduciary  currency  and  no  gold  reserve,  the  country  would 
be  deprived  of  a  means  of  settling  unfavorable  trade 
balances,  and  of  elasticity  in  its  internal  circulation. 
With  a  gold  fund,  gold  could  be  exported  to  settle  trade 
balances,  and  this  would  contract  the  circulation  by  the 
amount  of  silver  presented  for  the  gold  to  be  exported,  thus 
making  the  adjustment  an  automatic  one  and  maintaining 
an  equilibrium  in  the  currency  supply.2  A  careful  and 
far-sighted  administration  of  the  reserve,  they  said,  would 
correct  the  irregularities  of  the  strong  seasonal  swings  which 
prevailed  in  Mexican  exchange,  and  which  would  result  in 
serious  evils  under  the  rigid  system  proposed  by  the 
majority.3 

1  Com.  Mon.  Mex.,  Actas,  etc.,  pp.  182-87. 

2  Ibid.,  p.  184. 

3  Cf.  G.  Raigosa's  memorandum,  ibid.,  p.  170, 


CURRENCY  COMMISSIONS  517 

Mexico's  financial  condition  was  sound,  and  it  was 
claimed  she  could  well  afford  the  expense  of  establishing 
a  gold  reserve  at  once,  especially  since  a  substantial  part 
of  the  necessary  funds  would  in  a  short  time  be  obtained 
from  seigniorage  profits,  interest  on  that  part  of  the  re- 
serve fund  held  abroad,  and  exchange  premiums. 

To  the  argument  of  the  majority  that  the  use  of  a  reserve 
fund  to  expedite  the  attainment  of  the  legal  parity  would 
make  the  transition  too  sudden  and  cause  harmful  shocks 
to  business,  it  was  replied  that,  if  properly  managed,  the 
various  steps  in  raising  the  gold  equivalent  of  the  peso 
through  the  sale  of  drafts  at  declining  rates  on  the  gold 
reserve  fund  would  not  be  great  enough  to  cause  serious 
disturbance  in  a  country  so  accustomed  to  pronounced  ex- 
change fluctuations  as  was  Mexico.  Furthermore,  under 
the  plan  of  the  majority,  as  well  as  under  that  of  the  minor- 
ity, there  would  exist  a  tendency  to  speculate  in  exchange 
for  a  rise  in  the  gold  value  of  the  peso,  so  that  this  argu- 
ment of  threatened  speculation  was  a  sword  that  cut  both 
ways. 

Confidence  both  at  home  and  abroad  in  the  success  of 
the  reform,  the  minority  claimed,  would  be  strengthened 
greatly  by  positive  action  at  the  beginning  in  the  direction 
of  building  up  and  using  an  adequate  gold  reserve.  On 
this  subject  they  said,  having  reference  to  the  wavering 
attitude  of  the  majority : 

"The  success  of  every  currency  reform  necessarily  depends 
upon  the  confidence  which  the  public  place  in  the  new 
currency  and  in  the  certitude  which  it  may  entertain  con- 
cerning the  stability  of  its  value.  One  cannot  understand 
how  these  conditions  could  be  fulfilled  by  the  measures 
which  the  majority  of  the  fifth  subcommission  have  seen 
fit  to  recommend  to  the  Government,  since  they  hint  at  the 
possibility  that  the  legal  parity  between  gold  and  silver  will 
not  be  secured  by  the  plan  they  recommend,  and  outline 
subsidiary  means  that  ought  to  be  adopted  in  such  a  con- 


518         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

tingency.  The  majority  of  the  fifth  subcommission  de- 
clares that  in  case  the  establishment  of  the  legal  parity 
between  gold  and  silver  is  much  delayed,  the  surest  method 
of  obtaining  that  parity  would  consist  in  adding  to  the 
gold  reserve  fund  a  sum  sufficient  to  influence  the  home 
market  in  the  direction  of  giving  the  desired  stability 
to  the  rates  of  exchange.  Therefore  the  majority  un- 
doubtedly fear  that  the  mere  suspension  of  the  free  coin- 
age of  silver  will  not  suffice  for  the  object  proposed.  Now 
does  this  declaration  not  move  in  the  direction  of  destroy- 
ing in  advance  the  confidence  with  which  the  public  ought 
to  be  imbued  in  the  success  of  the  monetary  reform  about 
to  be  undertaken?"  l 

In  the  judgment  of  the  writer,  the  logic  of  the  argument 
was  in  favor  of  the  minority ;  so  likewise  was  the  teaching 
of  the  Indian  experience  from  1893  to  igo8.2  Of  like 
purport  later,  under  similar  circumstances,  came  the  les- 
sons of  the  Straits  Settlements  reform  of  1 905-06. 3  But 
the  logic  of  unexpected  developments  in  the  silver  market 
was  with  the  majority.  They  builded  better  than  they 
knew.  How  this  happened  will  appear  in  the  course  of 
the  narrative  of  events  to  which  we  shall  now  return. 


The  Monetary  Commission's  Report 

On  February  n,  1904  the  report  of  the  majority  of  the 
fifth  subcommission  was  formally  approved  as  the  report 
of  the  Commission.4  Upon  that  date  the  Commission's 
full  report  was  made  to  Finance  Minister  Limantour,  and 
the  Commission,  having  completed  its  labors  after  almost  a 
year  of  work,  was  dissolved.5 

1  Com.  Mon.  Mex.,  Actas,  etc.,  p.  184. 

2  Cf .  supra,  pp.  35-69. 

3  Cf.  supra,  pp.  410-19. 

4  Com.  Mon.  Mex.,  Actas,  etc.,  p.  235. 
6  Ibid.,  pp.  236-37. 


CHAPTER  IV 
A  GOLD-STANDARD  PLAN  ADOPTED 

TFE  Government  took  the  report  of  the  Commission 
under  advisement,  but  no  definite  action  was  taken  until 
May  21,  1904,  when  a  preliminary  decree  was  issued  under 
authority  of  the  budget  law  of  that  date  imposing  an  import 
duty  of  P  10  per  kilogram  on  Mexican  silver  pesos  when 
imported  in  quantities  greater  than  five  pesos.  This  duty, 
which  amounted  to  about  27  per  cent,  was  not  to  go  into 
effect  until  January  i.  On  November  16,  1904  Finance 
Minister  Limantour  submitted  to  the  Mexican  Congress 
a  bill  embodying  a  plan  of  currency  reform  modeled  closely 
upon  that  recommended  by  the  Monetary  Commission,1 
and  in  the  preamble  to  the  bill  the  Minister  gave  an  admirable 
review  of  the  entire  currency  problem  in  Mexico,  and  an 
explanation  of  the  reasons  underlying  the  various  provisions 
of  the  bill.2  Inasmuch  as  this  bill,  which  was  very  brief, 
laid  the  foundations  upon  which  the  entire  currency  reform 
was  constructed,  it  will  be  well  to  give  it  substantially  in 
full.3 

ART.  i.  Authority  is  given  to  the  Executive  of  the 
Union  to  reform  the  monetary  laws  of  the  Republic,  deter- 
mining the  kinds  of  money  which  shall  legally  circulate,  the 
value,  weight,  fineness,  and  other  characteristics ;  including 

1  El  Economista  Mexicano,  Nov.  19  and  26,  1904. 

2  The  preamble  and  bill  are  given  in  full,  in  Secretario  de  Estado  y  del 
Despacho  de  Hacienda  y  Credito  Publico,  Seccion  Cuarta,  Leyes  y  Dispo- 
siciones  Relativas  a  la  Reforma  Monetaria.    This  document  will  be  cited 
hereafter  as  Leyes  y  Dispos.,  etc.     An  English  translation  is  given  in  Int, 
Exch.  Com.,  Rep.  1904,  pp.  423-50. 

'Leyes  y  Dispos.,  etc.  pp.  31-32. 


520         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

the  fixing  of  the  limits  of  tolerance  for  their  coinage  and 
their  circulation,  and  in  general  to  make  such  regulations 
as  he  may  judge  necessary  to  perfect  the  country's  mone- 
tary system,  and  to  adapt  it  to  the  economic  needs  of  the 
Republic.  In  the  exercise  of  these  powers  the  Executive 
will  be  subject  to  the  following  rules : 

A.  The  present  peso  containing  24.4391  grams  of  pure 
silver  [corrected  in  the  subsequent  Act  to  24.4388],  and 
2.6342  grams  of  copper,  shall  be  retained  and  shall  be  un- 
limited legal  tender. 

B.  This  peso  shall  be  given  a  value  equivalent  to  75 
centigrams  of  pure  gold  [i.e.,  49.85  cents  United  States 
currency]. 

C.  Fractional  silver  coins  shall  contain  smaller  quanti- 
ties of  silver  in  proportion  to  their  value  than  the  peso. 
[Formerly,  as  we  have  seen  (pages  504-505),  their  fine  silver 
contents  as  compared  with  that  of  the  peso  were  almost 
exactly  proportionate  to  their  respective  values.] 

D.  Fractional  silver  coins  shall  not  be  legal  tender  for 
sums  larger  than  P  20  in  one  payment,  and  bronze  coins  in 
sums  larger  than  one  peso ;  but  the  Government  will  desig- 
nate offices  where  the  public  may  freely  exchange  for  silver 
pesos  fractional  coins  of  silver  or  bronze  when  presented  in 
sums  of  P  100  or  multiples  thereof. 

E.  The  mints  shall  not  be  obliged  to  coin  precious  metals 
presented  to  them,  but  the  issuance  of  coins  of  all  classes 
shall  be  reserved  to  the  Executive ;  and  it  may  exercise  this 
power  in  accordance  with  law  and  on  such  occasions  and 
in  such  quantities  as  it  may  prescribe. 

F.,  G.,  H.,  and  /.  [These  sections  give  authority  to  the 
Executive  to  reduce  or  otherwise  modify  the  taxes,  fees, 
etc.  imposed  by  the  Government  on  mining  and  on  articles 
used  in  mining.] 

/.  To  organize  offices,  which,  without  loss  to  the  public 
treasury,  may  advance  money  upon  the  security  of  silver 
bars,  and  to  apportion  to  those  interested  facilities  for 
the  sale  of  said  bars  under  the  best  conditions  possible, 
and,  with  this  end  in  view,  to  make  suitable  arrangements 
both  in  the  Republic  and  abroad. 


A  GOLD-STANDARD   PLAN  ADOPTED  521 

K.  To  modify  civil  and  mercantile  legislation  in  matters 
concerning  loans  and  the  payment  of  money. 

L.  To  modify  the  precepts  of  the  banking  law,  which 
are  directly  or  indirectly  connected  with  the  circulation  of 
metallic  money,  or  which  affect  instruments  of  credit  or 
exchange  operations. 

LL.  To  create  a  committee  whose  functions  shall  be  to 
regulate  the  monetary  circulation,  and  to  obtain,  so  far  as 
possible,  stability  in  the  rates  of  foreign  exchange ;  and  with 
this  object  the  Executive  shall  have  authority  to  confer  upon 
this  committee  such  powers  as  it  considers  suitable,  and, 
at  the  proper  time,  to  entrust  it  with  the  management  of  a 
special  fund,  which  shall  be  established  by  the  Executive. 

M.  To  issue  all  suitable  regulations,  such  as  are  in- 
tended to  repress  and  punish  misdemeanors  and  crimes 
connected  with  the  subject  matter  of  the  law ;  to  organize 
the  services  and  the  offices  which  may  be  necessary,  and  to 
defray  the  expenses  incurred  for  any  of  the  aforementioned 
purposes.  To  this  end  the  Executive  may  discontinue  or 
modify  the  present  distribution  of  offices,  their  personnel, 
and  the  appropriations  and  disbursements  authorized  by 
the  budget  of  expenditures. 

These  were  exceedingly  broad  powers  for  the  legislature 
to  confer  upon  the  Executive  —  much  broader  in  fact  than 
would  be  thought  of  in  an  Anglo-Saxon  country  —  but  in 
Mexico  in  those  days  of  President  Diaz  the  Executive 
absolutely  dominated  the  Legislature.  We  need  not  be 
surprised  to  learn  that  the  plan  proposed  by  the  Finance 
Minister  was  adopted  unanimously  and  without  discussion 
by  both  houses  of  the  Mexican  Congress,1  becoming  law 
December  9,  1 904.2 

The  Existing  Peso  to  be  Retained 

This  currency  reform  Act,  or,  more  correctly,  currency 
reform  enabling  Act,  in  the  few  positive  provisions  it 

1  Hegemann,  p.  147. 

2  The  text  of  the  law  is  given  in  Leyes  y  Dispos.,  etc.,  pp.  39-41. 


522         THE  MEXICAN    CURRENCY  REFORM,   1903-08 

contained,  and  in  its  implications,  conformed  with  the 
recommendations  of  the  Monetary  Commission;  the 
only  important  divergence  being  the  provision  of  sub- 
section A.  of  Article  i,  providing  for  the  retention  in 
circulation  of  the  existing  Mexican  peso,1  whereas  the 
Commission  had  recommended  the  coinage  of  a  distinc- 
tively new  peso. 

In  support  of  his  recommendations  for  the  continuance  of 
the  old  peso,  Finance  Minister  Limantour  called  attention 
to  the  long-continued  use  of  the  existing  peso  in  Mexico,  and 
the  urgency  of  respecting  the  traditional  custom  of  the 
people.  The  desire  to  avoid  any  cause  for  alarm  or  distrust, 
he  said,  had  caused  the  Executive  to  propose  the  retention 
of  the  present  Mexican  peso  without  any  alteration,  at 
least  for  some  time,  while  the  workings  of  the  new  system 
were  being  observed.  He  could  see  no  reason  for  adopting 
the  Commission's  recommendation  for  a  peso  of  the  same 
weight  but  of  a  new  design,  involving  the  expense  of  the 
recoinage  of  the  entire  peso  circulation  of  the  country,  ex- 
cept the  desire  to  prevent  the  fraudulent  reimportation  of 
Mexican  pesos  from  abroad.  The  danger  of  such  fraudulent 
importation  he  believed  to  be  very  slight  for  two  reasons.2 
The  first  was  "the  constant  absorption  of  silver,  and  partic- 
ularly of  Mexican  pesos,  by  the  countries  of  Eastern  Asia. 
None  of  the  white  metal  which  penetrates  into  the  interior 
of  those  regions  ever  comes  forth  again.  It  appears  as  if 
it  were  lost  or  destroyed,  or  modified  in  such  a  manner  as 
to  blot  out  all  traces  of  itself."  The  second  reason  was 
the  fact  that  the  profit  on  smuggling  would  be  too  small 
to  justify  the  expense  and  risks,  the  difficulty  of  reimpor- 
tation being  enhanced  by  the  fact  that  in  the  East  many 
of  these  coins  had  been  so  "chopped"  and  otherwise  marked 
by  local  banking  establishments  that  their  contraband 

1  Even  this  provision  was  optional,  since  the  Executive  was  authorized 
by  the  law  to  substitute  a  new  peso  for  the  old  one  if  he  should  think  desirable. 

2  Leyes  y  Dispos.,  etc.,  pp.  22-23. 


A  GOLD-STANDARD  PLAN  ADOPTED 


523 


character  would  quickly  be  revealed,  were  attempts  made 
to  smuggle  them  into  the  country. 

Reception  of  the  Proposed  Enabling  Act 

The  introduction  in  the  legislature,  November  16,  1904, 
of  the  bill  which  later  became  the  enabling  Act  was  im- 
mediately followed  by  a  substantial  rise  in  the  gold  value 
of  the  peso  as  measured  by  New  York  exchange  rates  (see 
chart  on  page  535).  For  the  week  ending  November  12, 
1904  the  average  rate  on  New  York  for  bank  drafts  was  215 
(i.e.,  P2i5  for  $100,  representing  a  value  of  $0.4652  to  P  i) ; 
it  dropped  to  2o8|  (i.e.,  $0.4796  to  P  i)  for  the  week  ending 
November  26.  Part  of  this  advance  in  the  gold  value  of  the 
peso  was  doubtless  due  to  the  rise  in  silver  at  that  time  re- 
sulting from  the  Russo-Japanese  war ;  but  it  is  noteworthy 
that  the  decline  in  the  exchange  rates  began  before  the 
advance  in  silver,1  and  that  the  margin  between  the  ex- 
change value  of  the  peso  and  the  bullion  value  was  an  in- 
creasing one. 

In  addition  to  the  favorable  movement  of  exchange  there 
was  other  evidence  that  the  announcement  of  the  plan  in- 

1  The  situation  is  shown  in  the  following  table : 


DATE,  1904 

BULLION  VALUE  OF  PESO 
U.  S.  CURRENCY 

EXCHANGE  ON  N.  Y. 
AVERAGE 

Week  Ending 

High 

Low 

Average 

Rate 
Value  of  $100 

Value  of 
Peso 

Cts. 

Cts. 

Cts. 

P 

Cts. 

Nov.    5 

46.41 

46.08 

46.34 

215.62 

46.38 

Nov.  12 

46.29 

46.08 

46.18 

215.00 

46.52 

Nov.  19 

46.29 

46.18 

46.27 

209.00 

47.85 

Nov.  26 

46.94 

46.29 

46.68 

204.25 

48.92 

Dec.     3 

47.27 

46.61 

46.99 

203-75 

49-09 

Figures  for  bullion  value  are  based  upon  daily  quotations  for  London 
price  of  standard  silver,  prompt  delivery.  Figures  for  exchange  on  New 
York  were  furnished  the  writer  by  the  National  Bank  of  Mexico. 


524         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

spired  the  business  community  with  confidence.  The  prices 
of  Mexican  securities  the  latter  half  of  November  tended 
upwards.1  The  London  Economist  said  in  its  issue  of  No- 
vember 19,  "  There  are  grounds  for  believing  that  Mexico  is 
getting  into  a  vigorous  stride  of  prosperity,  which  bids  fair 
to  overstep  all  earlier  bursts  of  advance  that  the  country 
has  experienced  in  years  gone  by."  2  Reference  was  made 
in  the  article  from  which  this  quotation  is  taken  to  the 
prospects  of  the  new  monetary  system  being  at  once 
adopted,  and  the  article  concluded  with  a  statement  that 
"It  is  significant  that  the  Mexico  3  per  cent  internal 
bonds,  the  interest  upon  which  is  payable  in  silver,  have 
risen  recently  from  about  24^  to  31^,  the  movement  being 
based  upon  advanced  speculation  as  to  the  adoption  of  a 
gold  standard."  El  Economista  Mexicano  in  its  issue  of 
November  26,  1904  quoted  from  a  railroad  authority 
writing  in  the  Mexican  Herald  "the  opinion  that  the 
monetary  reform  would  notably  stimulate  the  development 
of  the  railroad  business  in  Mexico,"  3  and  giving  as  one 
reason  the  fact  that  the  railroads  had  suffered  greatly  in 
the  past  because  their  incomes  were  in  silver  and  a  large  part 
of  their  expenses  were  in  money  of  the  United  States. 

Promulgation  by  the  Executive  oj  the  New  Currency  System 

The  enabling  Act  was  passed  December  9,  1904.  A 
series  of  executive  decrees  issued  under  its  authority  the 
latter  part  of  March  1905  promulgated  definitely  the  new 
currency  system.4  The  most  important  of  these  decrees 
was  the  first  of  two  decrees  dated  March  25,  1905.  So 
closely  did  the  decrees  follow  the  recommendations  of  the 
Monetary  Commission  already  discussed,  that  it  is  un- 

1  Cf.  figures  cited  by  Hegemann,  p.  147. 
*  Page  1858. 
*Page  170. 

4  These  decrees  and  all  others  concerning  the  currency  reform  down  to 
July  1906  are  published  in  Leyes  y  Dispos.,  etc. 


A  GOLD-STANDARD  PLAN  ADOPTED  525 

necessary  to  review  their  provisions  in  any  detail.  Their 
chief  points,  however,  may  briefly  be  summarized  as  follows. 
They  called  for  the  raising  of  the  peso  by  relative  con- 
traction of  the  currency  to  a  value  equivalent  to  that  of  75 
centigrams  of  pure  gold,  and  for  the  ultimate  maintenance 
of  the  fiduciary  circulation  at  a  fixed  par  with  gold  by  means 
of  the  principle  of  the  gold-exchange  standard.  The  existing 
Mexican  peso  was  to  be  continued  in  circulation  as  unlimited 
legal  tender  money,  but  its  free  coinage  for  circulation  in 
Mexico  was  to  be  discontinued  after  April  16,  1905.*  To 
the  Executive  alone  was  given  the  privilege  of  having  money 
coined.  This  meant  that  the  privilege  of  free  coinage  was 
denied  not  only  to  silver,  but  for  the  time  being  also  to  gold. 
The  new  gold  coins  were  to  be  .900  fine,  issued  in  denomina- 
tions of  ?5  and  Pio,  and  to  be  unlimited  legal  tender. 
Unless  otherwise  ordered  the  coinage  of  gold  money  was 
to  be  limited  to  the  quantity  necessary  to  redeem  the  gold 
money  of  the  old  system  which  remained  in  legal  circula- 
tion July  i,  IQ06.2  From  the  date  on  which  the  law  should 
go  into  effect  (i.e.,  May  i,  1905),  and  except  in  case  of  re- 
coinage,  new  silver  money  was  to  be  coined  only  in  exchange 
for  gold  coins  or  bars  at  the  legal  rate  of  75  centigrams  of 
pure  gold  to  the  peso,  and  the  gold  so  received  was  to  be 
used  to  purchase  silver  bars  from  which  to  coin  the  neces- 
sary silver  pieces,  until  the  amount  desired  should  be  pro- 
vided.3 The  existing  subsidiary  coins  were  to  be  withdrawn 
from  circulation,  and  for  them  were  to  be  substituted  new 
subsidiary  coins  of  lighter  weights  (i.e.,  385.8  grains  gross, 
to  the  peso  instead  of  417.8),  and  of  lower  millesimal  fineness 
(i.e.,  .800  instead  of  .9028).  Subsidiary  coins  were  not  to 
be  issued  except  for  the  purpose  of  recoinage  or  in  ex- 
change for  gold  at  the  legal  rate.  The  Executive  was 

1  Ibid.,  pp.  48  and  53. 

2  The  amount  of  gold  in  the  banks  and  public  treasuries  of  Mexico  at  the 
end  of  1904  as  reported  by  the  Director  of  the  U.  S.  Mint  in  his  Report  for 
1905  (p.  38)  was  but  $8600. 

3  Leyes  y  Dispos.,  etc.,  pp.  48-49. 


526         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

authorized  to  issue  coins  of  nickel  and  bronze,  but  there 
was  a  strict  limitation  upon  the  amount.1  The  decree  pro- 
hibited under  heavy  penalties  "the  employment  as  con- 
ventional symbols,  in  substitution  for  legal  money,  of 
counters,  tallies,  small  plates,  or  other  objects  of  any 
character  whatever."  2 


Restrictions  Placed  upon  the  Issue  of  Bank  Notes 

The  above-mentioned  rigid  limitations  placed  upon  the 
amounts  of  money  that  could  be  coined,  and  the  prohibition 
on  the  use  of  money  substitutes,  were  of  course  motivated 
by  a  desire  to  prevent  any  increase  in  the  circulating  medium 
which  would  interfere  with  the  operation  of  the  plan  of 
raising  the  value  of  the  peso  by  a  relative  contraction  of 
the  currency  supply.  One  difficulty  that  confronted  the 
authorities  in  this  connection  was  the  danger  that  the  de- 
sired rarefication  of  the  currency  would  be  prevented,  or 
at  least  hindered,  by  increases  in  the  issue  of  bank  notes. 
The  law  of  March  19,  1897  3  prohibited  banks  of  issue  from 
issuing  bank  notes  in  excess  of  three  times  their  paid-up 
capital,  the  legal  minimum  capital  at  that  time  being 
P5oo,ooo.4  It  also  provided  that  the  note  issue,  together 
with  the  deposits  6  payable  on  demand  or  at  not  more  than 
three  days'  notice,  should  not  exceed  "twice  the  holdings  of 
the  bank  in  cash  and  gold  and  silver  bullion."  The  notes 
could  not  be  issued  in  denominations  less  than  P  5  and  were 
not  legal  tender.  They  were  redeemable  on  demand  at  the 

1  Leyes  y  Dispos.,  etc.,  p.  49. 

2  Ibid.,  p.  51. 

3  For  copy  of  law,  see  Charles  A.  Conant,  The  Banking  System  of  Mexico, 
pp.  172-213. 

4  A  discussion  of  the  limitations  placed  upon  the  issue  of  bank  notes  in 
Mexico  will  be  found  in  Jean  Favre,  Les  Banques  au  Mexique,  pp.  39-42. 

5  The  word  deposit  here  was  given  a  narrow  meaning  which  excluded 
current  accounts  arising  from  loans  —  the  largest  part  of  the  commercial 
deposits,  using  the  word  in  the  sense  customary  in  the  United  States.    Cf. 
law,  chap.  2,  arts.  16  and  17. 


A  GOLD-STANDARD  PLAN  ADOPTED  527 

head  office  of  the  issuing  bank,  but  each  branch  was  required 
only  to  redeem  its  own  notes.  Charters  of  banks  of  issue 
in  no  case  could  run  beyond  30  years.  Important  special 
privileges,  chiefly  consisting  of  exemptions  from  taxation  of 
certain  kinds,1  were  conferred  upon  banks  chartered  under 
the  law  of  1897.  The  bank-note  circulation  of  Mexico 
had  grown  very  rapidly  in  the  years  immediately  preceding 
the  currency  reform.  At  the  end  of  January  1890  there 
were  in  the  Republic  five  banks  of  issue  having  a  total  out- 
standing circulation  of  P2i.i  millions,  and  against  these 
notes  and  other  liabilities  these  five  banks  held  cash  re- 
serves of  P  15.1  millions,  leaving  an  uncovered  circulation 
of  P6  millions.2  By  January  i,  1905,  about  three  months 
before  the  new  currency  decree  was  issued,  the  number  of 
banks  of  issue  had  increased  nearly  fivefold,  and  the  bank- 
note circulation  had  risen  from  P2i.i  millions  to  P83-5 
millions,3  the  cash  reserves  (exclusive  of  bank  notes  of  other 
banks)  having  risen  to  P  76.8  millions.  The  increase  in  the 
uncovered  circulation,  therefore,  was  only  slight,  i.e.,  from 
P  6  millions  to  P  6. 7  millions.  Meanwhile,  however,  deposits 
of  various  kinds,  including  current  accounts,  had  increased 
from  P25-3  millions  January  31,  1890  to  ?22i  millions.4 
At  the  beginning  of  1905  the  paid-up  capital  of  the  banks 
of  issue  was  P874  millions,  so  that  taken  together  the  total 
amount  of  notes  outstanding  was  less  than  one  third  the 
limit  fixed  by  the  law  of  1897,  i.e.,  than  an  amount  equal  to 
three  times  the  paid-up  capital.  Moreover,  on  the  basis 
of  legal  reserve  requirements  the  authorized  limit  of  circu- 
lation of  all  banks  taken  together,  without  any  increase  of 
total  reserves,  would  have  been  over  sixty  million  pesos 
more  than  the  amount  outstanding,  or  a  sum  considerably 
greater  than  the  total  metallic  circulation  of  the  country 

1  Conant,  The  Banking  System  of  Mexico,  p.  15. 

2  Com.  Mon.  Mex.,  Estadistica  Bancaria,  pp.  214-15. 

3  Conant,  The  Banking  System  of  Mexico,  folder  No.  4 ;  also  pp.  54-59. 

4  Psi4  millions  of  this  sum  are  designated  as  "various  debts,"  but  ap- 
parently consist  chiefly  of  active  current  accounts. 

2M 


528         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

outside  of  the  reserves  of  the  banks  of  issue.  Such  a  possi- 
bility for  currency  expansion  clearly  threatened  the  success 
of  any  plan  of  relative  contraction  through  limitation 
of  coinage  alone. 

How  did  the  Government  meet  this  difficulty?  It  met 
it  chiefly  by  means  of  the  following  measures,  a  brief  men- 
tion of  which  will  be  sufficient,  since  the  immediate  result 
in  each  case  was  the  obvious  one.  They  were :  (i)  In- 
sistence upon  a  somewhat  broader  interpretation  of  the 
term  deposits  in  connection  with  the  provisions  of  the  bank- 
ing law  concerning  legal  reserves  against  deposits,  thereby 
increasing  the  legal  reserve  requirements  for  banks  of  issue  1 
and  further  limiting  the  issue  of  bank  notes.  (2)  With- 
drawal from  the  banks  of  the  privilege  given  them,  under 
the  Act  of  March  19,  1897,  of  counting  silver  bars  as  part  of 
their  reserves ;  and  withdrawal  of  the  privilege  of  counting 
gold  bars,  until  such  a  time  as  the  free  coinage  of  gold  should 
be  authorized.2  Concerning  the  use  of  gold  bars  the  pre- 
amble of  the  decree  said  that,  while  free  coinage  of  gold 
did  not  exist,  it  would  be  contrary  to  the  fundamental 
principle  of  the  new  currency  legislation  to  permit  banks 
of  issue  to  count  gold  bars  as  part  of  their  reserves ;  since, 
although  the  owners  of  these  bars  would  have  the  legal 
right  to  have  them  redeemed  in  silver  coin,  the  privilege  of 
substituting  bars  for  money  in  one  of  its  most  important 
uses  would  be  equivalent  in  a  way  to  permitting  the  banks 
to  increase  arbitrarily  the  quantity  of  money  in  circula- 
tion.3 (3)  The  imposition  of  a  more  rigorous  govern- 
mental supervision  of  banks  so  as  to  insure  a  more  effective 
enforcement  of  the  law.4  (4)  Certain  positive  and  direct 
measures  to  prevent  the  banks  from  unduly  increasing  their 
note  issues.  The  decree  of  May  13,  1905  (art.  5)  had  pro- 

1  Decree  of  May  13,  1905.    Leyes  y  Dispos.,  pp.  129-30. 

2  Ibid.,  pp.  129-31. 

3  Ibid.,   pp.    129-30. 

4  Ibid.,  pp.  131-32. 


A  GOLD-STANDARD  PLAN  ADOPTED  529 

vided  that  no  new  concessions  should  be  made  for  the  es- 
tablishment of  banks  of  issue  before  December  31, 1909,  and 
that  those  established  after  that  date  should  not  enjoy  the 
immunities  from  taxation  granted  to  those  already  estab- 
lished under  the  Act  of  March  19,  1897,  and  further,  that 
they  should  be  subject  to  a  special  tax  in  favor  of  the  Fed- 
eration of  2  per  cent  per  annum  upon  the  paid-up  capital. 
The  fact  that  the  Executive  had  in  his  control  the  renewal 
of  bank  charters,  and  the  authority  to  grant  or  deny  appli- 
cations for  the  increase  or  diminution  of  capital,1  gave  him 
the  whip  hand  over  the  banks.  An  order  of  September  15, 
1905  2  tied  to  the  authorization  of  further  increases  in  capi- 
tal the  condition  that  banks  desiring  such  authority  should 
obligate  themselves,  during  a  certain  period  to  be  deter- 
mined by  the  Finance  Minister  (and  later  fixed  to  terminate 
in  I909),3  neither  to  increase  their  note  circulation  without 
a  corresponding  increase  in  their  metallic  reserves,  nor  to 
decrease  their  metallic  reserves  without  decreasing  to  the 
same  extent  their  note  circulation.4 

Two  restrictions  later  placed  upon  banks  of  issue  for  the 
purpose  of  expediting  the  reform  were :  the  order  of  August 
28,  1906  forbidding  banks  to  count  the  old  coins  that  were 
being  withdrawn  as  part  of  their  legal  reserves ;  and  that 
of  June  10,  1907  restricting  the  amount  of  fractional  silver 
that  could  be  counted  as  reserve  money  to  5  per  cent  of 
the  total  reserve  requirements.  The  Finance  Minister  said 
in  explanation  of  this  latter  order  that  the  amounts  of 
fractional  silver  held  by  banks  in  their  reserves  had  been 

1  Art.  u,  sec.  3  of  Bank  Act. 

8  Diario  Official,  Sept.  15,  1905. 

*  Enriquez  Martinez  Sobral,  La  Reforma  Monetaria,  p.  179. 

4 At  a  later  date  the  Finance  Minister  said:  "The  apparent  lack  of 
elasticity  in  the  bank-note  circulation  [from  October  1905  to  October  1906] 
was  not  to  be  wondered  at,  when  one  remembered  that  a  large  proportion  of 
the  banks  recently  pledged  themselves  to  the  administration  not  to  increase 
their  note  circulation  beyond  certain  limits  without  at  the  same  time  in- 
creasing in  like  degree  their  metallic  reserves."  Econ.  Mex.,  XLIII,  1906, 
p.  248. 

2M 


530         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

steadily  increasing,  and  that  the  proportion  generally  ex- 
ceeded 10  per  cent  and  in  some  cases  ran  as  high  as  40  per 
cent  of  the  reserve.1 

Measures  to  Alleviate  the  Hardships  Expected  to  Result  to 
the  Mining  Interest  from  the  Currency  Reform 

It  does  not  fall  within  the  province  of  this  book  to  discuss 
in  any  detail  the  numerous  measures  adopted  by  the  Gov- 
ernment to  alleviate  the  hardships  to  the  mining  industry, 
particularly  to  that  of  silver  mining,  which  were  expected 
to  arise  as  the  result  of  the  closing  of  the  Mexican  mints 
to  the  free  coinage  of  silver.  From  the  beginning  of  the 
discussions  concerning  the  reform  the  authorities  had  shown 
a  disposition  to  protect  these  interests ; 2  and  upon  the  same 
date,  March  25,  1905,  that  the  Executive  issued  the  decree 
creating  the  new  monetary  system,  it  issued  a  second  decree 
concerning  taxes  and  privileges  in  the  mining  industry,3 
which  granted  to  those  interested  in  silver  and  gold  mining 
tax  exemptions,  tax  reductions,  and  other  special  privileges.4 

1  Institutiones  de  Credito.    Leyes  y  Circulares,  etc.,  1908,  p.  79. 

2  Cf.  supra,  p.  489.  3  Leyes  y  Dispos.,  etc.,  pp.  57-62.  " 

4  This  decree  and  certain  subsequent  ones,  notably  that  of  March  30, 
1905,  provided  for : 

"[i]  A  reduction  in  the  taxes  imposed  upon  the  precious  metals,  and  a 
graduation  of  those  levied  on  silver  according  to  its  market  value.  .  .  . 

[2]  Exemption  from  taxes  on  certain  parts  of  the  productive  process  in 
the  production  of  gold  and  silver.  .  .  . 

[3]  Reduction  of  property  taxes  on  gold  and  silver  mines.  .  .  . 

[4]  Exemption  from  taxes  on  machinery  imported  for  use  in  the  mining 
industry. 

[5]  Exemption  from  taxes  on  important  materials  necessary  for  the  work- 
ing of  the  mines. 

[6]  The  establishment  of  a  public  service  through  which  the  mine  owners 
would  be  permitted  to  present  their  [gold  and  silver]  bars  to  the  mint  in  the 
City  of  Mexico,  in  order  that  they  might  be  sold  abroad  for  the  account 
of  the  interested  parties,  under  the  most  favorable  conditions  possible,  with- 
out any  commission  charge  whatever  for  the  service,  so  as  to  assure  to  the 
miners  the  largest  possible  part  of  the  sale  price  of  the  bars.  Sobral,  La 
Reforma  Monetaria,  pp.  180-81.  Cf.  also  Viollet,  Le  Probleme  de  1'Argent, 
pp.  208-14. 


A  GOLD-STANDARD   PLAN  ADOPTED  531 

The  Reserve  Fund 

The  last  topic  that  calls  for  attention  in  the  monetary 
decree  of  March  25,  1905  is  the  action  taken  concerning 
the  mooted  question  of  a  reserve  fund.  While  the  Execu- 
tive followed  the  recommendation  of  the  Monetary  Com- 
mission in  not  creating  a  reserve  for  immediate  use  in 
raising  the  peso  to  the  new  gold  par,  and  in  not  assuming 
any  obligation  for  the  conversion  of  silver  coins  into  gold  in 
the  future,  it  none  the  less  took  immediate  steps  for  the 
creation  of  a  reserve  fund.  Chapter  4  of  the  decree  estab- 
lishing the  new  monetary  system  l  created  a  fund  entitled 
Fondo  Regulador  de  la  Circulation  Monetaria,  the  funda- 
mental object  of  which  was  to  "facilitate  the  adaptation 
of  the  monetary  circulation,  as  regards  the  quantity  of 
money,  to  the  exigencies  of  a  stable  foreign  exchange."  It 
was  apparently  with  the  purpose  of  giving  the  Executive  a 
free  hand  that  the  object  of  the  Fund  was  expressed  in  such 
vague  and  general  terms.2  The  Fund  was  to  be  a  trust 
fund,  separate  from  other  government  funds,  and  was  to 
be  obtained  from  the  following  sources :  (i)  An  initial  con- 
tribution of  P  10,000,000  from  the  public  treasury,  which 
might  be  raised  to  Pi 5, 000,000  in  case  the  Finance  Minis- 
ter should  consider  such  an  increase  necessary.  (2)  Cer- 
tain sums  which  the  budget  of  expenditure  would  designate 
to  cover  losses  from  abrasion  of  coins  as  shown  by  the  re- 
coinage.  (3)  Seigniorage  profits,  of  which  at  the  beginning 
the  most  important  would  be  those  arising  from  the  re- 
coinage  of  a  certain  number  of  peso  pieces  into  fractional 
coins.  (4)  Profits  from  foreign  exchange  operations. 

(5)  Net  profits  on  the  coinage  of  pesos  for  exportation. 

(6)  Other  profits  incidental  to  the  regulation  and  mainte- 
nance of  the  Fund. 

The  Regulator  Fund  so  constituted  was  to  be  divided  into 

1  Leyes  y  Dispos.,  etc.,  pp.  52-53. 
2Sobral,pp.  174-75. 


532         THE  MEXICAN  CURRENCY  REFORM,   1903-08 

two  parts,  one  to  be  kept  in  Mexico  and  one  abroad ;  the 
former  to  consist  of  "metallic  money  and  exceptionally  of 
gold  or  silver  bars  destined  for  coinage  ...  to  be  held  as 
a  confidential  deposit  in  the  National  Bank  of  Mexico  or  in 
some  other  establishment  of  first  rank";  the  latter  to  be 
deposited  abroad  in  foreign  banks  or  banking  houses  of 
high  standing.  To  the  Regulator  Fund  were  to  be  charged 
only  those  expenses  and  losses  which  clearly  arose  from  the 
deposit,  movement,  and  location  of  the  Fund,  or  from  the 
foreign  exchange  operations  in  which  the  Fund  was  em- 
ployed. All  other  expenses,  such  as  salaries,  coinage  ex- 
penses, and  the  like,  were  to  be  charged  to  other  funds.1 

The  Regulator  Fund  was  not  to  be  administered  by  the 
finance  department  of  the  Government,  but  by  a  special 
commission,  which  was  created  a  few  days  later  in  the  decree 
of  April  3,  iQO5,2  designated  as  the  Commission  on  Exchange 
and  Money  (Comision  de  Cambios  y  Monedd).  The  Com- 
mission was  an  honorary  one  and  consisted  of  ten  members 
including  the  Finance  Minister,  two  other  government 
officials,  and  seven  non-official  members.3  Appointments 
were  for  one  year.  Upon  the  Commission  the  decree 
conferred  large  powers,  the  exercise  of  some  of  which,  how- 
ever, were  subject  to  the  approval  of  the  Finance  Minister.4 
Subject  to  the  broad  provisions  of  the  decree,  the  Com- 
mission's powers  included  the  regulation  of  the  quantities 
and  denominations  of  the  various  kinds  of  money  to  be 

1  Leyes  y  Dispos.,  etc.,  pp.  52-53. 

2  Ibid.,  pp.  93-96. 

3  The  ten  members  were :    the  Finance  Minister,  the  Treasurer-General 
of  the  Federation,  the  Director  of  the  Mint,  a  representative  of  the  National 
Bank  of  Mexico,  one  representative  each  from  two  of  the  principal  banks  of 
Mexico,  and  four  voters  to  be  appointed  by  the  Finance  Minister.    The 
non-official  members  need  not  be  Mexican.    Ibid.,  pp.  93-94. 

4  In  general  it  may  be  said  that  the  approval  of  the  Finance  Minister  was 
required  for  operations  involving  substantial  pecuniary  responsibilities  for 
the  Government ;  or  operations  taking  place  partly  in  foreign  countries,  such 
as  the  deposit  of  part  of  the  Fund  abroad,  the  arrangements  for  the  sale  of 
foreign  drafts  on  the  Fund,  and  the  sale  abroad  of  gold  and  silver  for  the 
account  of  mine  operators. 


A  GOLD-STANDARD   PLAN  ADOPTED  533 

coined ;  the  purchase  of  bullion  for  coinage ;  the  establish- 
ment of  federal  offices  for  the  exchange  of  money ;  the  ex- 
change of  the  new  money  for  the  old,  and  of  fractional  coins 
for  pesos  and  vice  versa;  the  placing  of  the  new  money  in 
circulation ;  the  administration  of  the  Regulator  Fund, 
including  its  formation,  investment,  and  use  for  the  stabiliz- 
ing of  exchange.  Concerning  the  last  named  power  the 
decree  gave  to  the  Commission  authority  to  "employ  the 
Fund  for  all  banking  operations,  and  operations  in  the  ex- 
change of  money,  which  appear  to  be  conducive  to  the 
stabilizing  of  foreign  exchange  rates  and  to  the  satisfying 
of  the  demands  of  the  internal  circulation."  1 

1 A  detailed  statement  of  the  powers  of  the  Commission  is  contained  in 
the  decree.    Leyes  y  Dispos.,  etc.,  pp.  94-95. 


CHAPTER  V 
How  THE  PLAN  WORKED 

SUCH  were  the  chief  legislative  and  administrative 
measures  adopted  by  the  Mexican  Government  for  the  pur- 
pose of  bringing  about  a  relative  contraction  of  the  currency 
and,  through  the  principle  of  scarcity  value,  of  raising  the 
gold  value  of  the  Mexican  peso,  and  with  it  that  of  the 
new  fractional  coins,  to  a  gold  par  of  75  centigrams  of  pure 
gold  to  the  peso,  and  thereafter  of  maintaining  it  at  that 
level.  We  are  now  in  position  to  consider  the  question : 
How  did  the  plan  work? 

The  monthly  fluctuations  in  the  exchange  value  and  the 
bullion  value  of  the  Mexican  peso  for  the  period  1901  to 
1908  are  shown  graphically  on  the  following  chart,  the 
figures  for  which  are  given  in  Appendix  A.1 

It  has  previously  been  noted 2  that  about  the  middle  of 
November  1904,  when  the  currency  reform  enabling  Act  of 
December  9  was  first  introduced  in  the  Mexican  Congress, 
there  was  evidence  that  the  proposed  reform  would  be  fa- 
vorably received  by  the  business  community  both  in  Mexico 
and  abroad*  and  that  both  Mexican  exchange  rates  and  the 
prices  of  Mexican  securities  reflected  this  attitude.  A  ref- 
erence to  the  chart  will  show  that  from  the  spring  of  1904 
until  August  1905  Mexican  exchange  on  New  York  ruled 
almost  continually  at  rates  that  gave  the  peso  an  appre- 
ciably higher  value  as  money  than  as  bullion ;  and  that  the 
exchange  value  of  the  peso,  having  risen  in  November  and 

1  Infra,  p.  549. 

2  Supra,  pp.  523-24. 

534 


HOW  THE  PLAN  WORKED 


535 


December  1904  from  a  value  of  approximately  46  cents 
United  States  currency  to  one  of  49^  cents,  partly  under  the 
influence  of  local  conditions  in  Mexico  but  chiefly  under  that 
of  a  rising  silver  market,  never  again  declined  to  its  former 
level.  In  fact,  even  before  the  gold  standard  decree  of 
March  18,  1905  was  issued,  the  money  value  of  the  peso 
as  measured  by  exchange  rates  seemed  to  have  attained, 


MEXICAN  CURRENCY 
BEFORM  OF  1903-1908 


though  insecurely,  a  49^  cent  level,  and  to  have  become 
fairly  well  divorced  from  bullion  value. 

As  in  the  case  of  the  Straits  Settlements  only  a  few 
months  before,1  the  announcement  of  the  plan  to  raise  the 
value  of  the  monetary  unit  by  relative  contraction  of  the 
currency  led  to  a  great  influx  of  pesos  into  the  country 
to  take  advantage  of  the  anticipated  rise  in  their  value. 
This  influx  into  Mexico  began  as  early  as  November  16, 

1  Cf.  supra,  p.  404. 


536          THE  MEXICAN  CURRENCY  REFORM,   1903-08 

1904,  and  continued  until  January  i,  1905,*  when  a  decree 
of  November  23,  1904  placing  a  prohibitive  duty  of  Pio 
per  kilogram  on  the  importation  of  Mexico  pesos  went  into 
effect.2  Not  only  was  there  a  substantial  influx  of  pesos 
from  without  Mexico,  but  a  fact  of  even  greater  importance 
was  that  the  usual  large  exportation  of  pesos  from  Mexico 
ceased  almost  entirely.  The  exports  of  Mexican  pesos  were 
P  21  millions  for  the  fiscal  year  1902-03,  P  18.6  millions  for 
1903-04,  and  only  Pi. 8  millions  for  the  period  July  1904 
to  June  i905.3 

This  influx  of  pesos  into  a  market  that  was  apparently 
already  oversupplied  would  be  expected  to  render  more 
difficult  the  process  of  raising  the  value  of  the  peso  by  rela- 
tive contraction,  and  it  doubtless  had  that  tendency.  But 
this  effect  was  offset  by  several  important  forces,  the  chief 
of  which  were  the  following :  (i)  The  great  rise  in  the  price 
of  silver  in  the  latter  part  of  1904,  and  the  buoyant  effect 
of  this  rise  upon  Mexico's  silver  industry.  (2)  The  general 
business  prosperity  of  Mexico  at  this  time,  and  the  rising 
confidence  for  the  future  —  conditions  which  appear  to  have 
been  favored  by  the  prospects  of  a  gold  standard  currency.4 

1  "On  the  announcement  of  the  passing  of  a  bill  in  Mexico  placing  the 
peso  on  a  fixed  basis  the  price  [of  Mexican  pesos  per  ounce]  rose  to  27^.,  and 
all  the  pesos  that  were  available  here  [in  London]  were  at  once  shipped  tQ 
Mexico  to  take  advantage  of  the  premium  obtainable  over  their  intrinsic 
value."    Pixley  and  Abell  Circular,  December  31,  1904. 

2  Leyes  y  Dispos.,  etc.,  pp.  35-36. 

3  Hegemann,  p.  163. 

4  The  following  quotations  from  two   New  York  financial  newspapers 
are  apposite : 

"  [The  announcement  yesterday  that  the  new  Mexican  currency  system 
was  to  be  put  into  effect  May  i]  was  the  subject  of  a  great  deal  of  discussion 
in  the  Street  among  men  who  have  a  financial  interest  in  enterprises  in 
Mexico,  or  who  are  familiar  with  the  country.  It  was  the  universal  opinion 
that  within  a  few  months  at  the  longest,  a  large  amount  of  American  money 
will  be  invested  in  Mexico.  ...  It  is  known  that  for  some  time  American 
capitalists  have  simply  been  waiting  for  a  definite  announcement  as  to  when 
the  new  monetary  system  would  become  effective  before  increasing  their  in- 
vestments in  Mexico  or  placing  money  there  for  the  first  time.  It  is  the 
opinion  of  men  here  who  are  altogether  familiar  with  Mexican  affairs 


HOW  THE  PLAN  WORKED  537 

This  caused  an  increased  demand  for  currency.  (3)  The 
restrictions  imposed  by  the  Government  on  the  expansion 
of  bank  credit,  particularly  in  the  form  of  bank  notes.1 
(4)  The  withdrawal  from  active  commercial  use  by  the 
National  Bank  of  Mexico  of  the  P  10,000,000  representing 
the  initial  contribution  of  the  Government  to  the  Regulator 
Fund.2  (5)  The  narrow  margin  between  the  bullion  value 
of  the  peso  for  the  period  from  November  1904  to  Feb- 
ruary 1905  and  the  50  cent  gold  par;  and  the  result- 
ing confidence  in  the  early  attainment  of  the  par,  leading 
people  to  hold  pesos  for  the  prospective  rise  in  their  value 
and  to  speculate  for  a  fall  in  exchange.  (6)  The  fact  that 
the  period  during  which  the  peso  was  held  at  an  exchange 
value  much  above  its  bullion  value  was  a  short  one,  and  one 
not  subject  to  serious  trade  vicissitudes.  The  great  rise 
in  silver  the  latter  part  of  1905  placed  strong  supports  under 
the  relatively  high  exchange  value  of  the  peso  before  that 
value  had  been  threatened  by  any  serious  business  storms 
or  trade  depressions. 

that  not  later  than  August  or  September,  the  increase  in  business  in  Mexico 
will  become  decidedly  perceptible."  Wall  Street  Summary,  March  28, 
1905. 

"During  a  recent  conversation  in  Washington  Joaquin  D.  Casasus, 
Mexico's  Ambassador  to  the  United  States,  told  the  writer  that  fully 
$100,000,000  of  new  foreign  capital  has  been  invested  in  enterprises  in  Mexico 
during  the  year  just  closing.  Of  this  amount  over  $60,000,000  represented 
money  invested  in  the  stock  of  five  or  six  banks  in  Mexico  City  and  several 
interior  cities  of  the  Republic,  which  have  increased  their  capital  during  the 
year.  The  balance  of  the  $100,000,000  represents  investments  in  industrial, 
mining,  and  railroad  securities  in  Mexico.  During  the  last  six  months  the 
earnings  of  the  railroads  in  that  country  have  increased  materially,  and  the 
officials  in  charge  are  unanimous  in  ascribing  these  favorable  results  to  the 
adoption  of  the  new  monetary  system."  New  York  News  Bureau,  Decem- 
ber 14,  1905. 

1  Cf.  supra,  pp.  526-30. 

2  Conant,  pp.  70  and  73. 


538          THE  MEXICAN  CURRENCY  REFORM,   1903-08 

Great  Rise  in  the  Gold  Price  of  Silver 

On  April  7,  1905  the  sharp  decline  in  the  London  price 
of  silver  of  the  fore  part  of  the  year  (see  chart  on  page 
535)  reached  its  nadir  with  a  price  of  251^.  per  ounce, 
giving  the  Mexican  peso  a  bullion  value  of  43.8  cents. 
This  was  24  days  before  the  Mexican  gold  standard  decree 
of  March  25  was  to  go  into  effect,  and  nine  days  before  the 
Mexican  mints  were  to  be  closed  to  the  free  coinage  of  silver. 
The  price  of  the  white  metal,  under  the  influence  of  silver 
purchases  for  India  and  the  depreciation  of  gold,  now  began 
one  of  the  most  pronounced  upward  movements  in  its 
history.1  From  25^^.  per  ounce  on  April  7  it  rose  to  26%d. 
on  April  17,  the  day  after  the  closing  of  the  Mexican  mints, 
representing  an  advance  of  4.2  per  cent  in  10  days.  It 
hovered  about  that  level  for  slightly  over  a  month,  and  then 
began  an  irregular  but  pronounced  upward  movement  which 
continued  until  November  17, 1906.  The  bullion  par  of  the 
peso,  i.e.,  the  price  of  silver  per  ounce  at  which  its  bullion 
content  would  be  worth  in  London  75  centigrams  of  pure 
gold,  was  28riM.  As  early  as  August  29, 1905  silver  reached 
a  point  within  0.6  per  cent  of  the  bullion  par ;  on  October 
21  it  reached  bullion  par ;  and  for  the  month  of  November 
it  averaged  1.9  per  cent  above  bullion  par,  reaching  in  that 
month  a  maximum  of  4.8  per  cent  above.  For  every 
month  of  1906  and  every  month  of  1907  down  to  October 
the  price  of  silver  averaged  well  above  bullion  par,  the 
average  margin  reaching  13  per  cent  for  the  month  of 
November  1906,  and  the  maximum  margin  reaching  14.5 
per  cent  on  the  i7th  of  that  month.  The  situation  by 
months  for  the  period  1905-07  is  shown  in  the  following 
table: 

1  For  a  discussion  of  this  rise,  its  causes  and  effects,  see  Kemmerer, 
The  Recent  Rise  in  the  Price  of  Silver  and  Some  of  its  Monetary  Con- 
sequences, Quart.  Journ.  Econ.,  XXVI,  1912,  pp.  215-84,  especially 
215-39- 


HOW  THE  PLAN  WORKED 


539 


PERCENTAGE  MARGIN  OF  HIGHEST  AND  AVERAGE  PRICE  OF  SILVER  IN 
LONDON  ABOVE  (OR  BELOW)  BULLION  PAR  OF  MEXICAN  DOLLAR 


MONTH 

1905 

1906 

1907 

HIGHEST 

AVERAGE 

HIGHEST 

AVERAGE 

HIGHEST 

AVERAGE 

January       .     . 

*i-9 

*3-4 

4-6 

4.1 

12.2 

9-9 

February 

*2.I 

*3-o 

6-5 

5-3 

II.  I 

IO.I 

March    .     .     . 

*4.2 

*7-4 

5-2 

3-3 

10.9 

8.2 

April 

*7-9 

*9.6 

5-7 

3-6 

5-5 

4.7 

May  .... 

*5-6 

*7-8 

8-5 

7-i 

7.6 

5-4 

June  .... 

*6.2 

*6.9 

7.6 

4-5 

7-4 

6.8 

July.     .     .     . 

*S-6 

*6.2 

5-2 

4.2 

10.4 

8-5 

August   .     .     . 

*o.6 

*3-2 

7.0 

5-5 

"•S 

9-5 

September  .     . 

*o.6 

*M 

9.8 

8.9 

9.1 

8.1 

October  .     .     . 

0.0 

*I.O 

12.6 

II.  2 

6.8 

*0.2 

November  .     . 

4.8 

1.9 

14-5 

13.0 

*3-o 

•6.x 

December    .     . 

4.8 

3-7 

12.0 

10.7 

*7-5 

*9-4 

Year.     .     .     . 

4.8 

*3-8 

14-5 

6.8 

12.2 

4.9 

'Below. 


How  the  Mexican  Government  Met  the  Emergency  and  In- 
cidentally Placed  the  Currency  System  upon  a  Strict 
Gold  Standard 

While  this  phenomenal  advance  in  the  price  of  silver 
came  as  a  surprise  to  the  Mexican  authorities,  it  cannot  be 
said  that  they  were  unprepared  to  meet  it.  The  thorough- 
ness with  which  the  Monetary  Commission  had  gone  into 
the  entire  subject  of  the  monetary  reform  had  not  stopped 
short  of  formulating,  though  rather  loosely,  tentative  plans 
by  which  to  meet  such  an  emergency,  improbable  though 
it  seemed.  Moreover,  the  sharp  rise  in  silver  the  latter 
part  of  1905  had  been  a  further  warning  to  the  authorities 
to  be  prepared  for  such  a  contingency.  The  majority  of 
the  fifth  subcommission  had  said  in  their  report  which 
was  adopted  as  the  report  of  the  Commission : 


540          THE  MEXICAN  CURRENCY  REFORM,   1903-08 

"  The  fourth  subcommission,  taking  as  its  base  the  average 
price  of  the  white  metal  for  the  years  1893  to  1902  inclusive, 
has  supported  with  abundance  of  sound  reasons  the  ex- 
pediency of  adopting  a  ratio  not  below  i  to  36  nor  above 
i  to  32.  No  one  combatted  this  opinion  except  Mr.  Jose 
de  Landero  y  Cos,  to  whom  it  appeared  that  not  even 
the  last  of  these  ratios  offered  a  sufficient  margin  to  assure 
the  maintenance  of  the  new  money  at  a  value  above  its 
value  as  mere  bullion,  since  the  rise  in  the  price  of  silver 
which  had  characterized  the  closing  months  of  the  present 
year1  [1903],  gave  reason  to  fear  because  of  its  unusual 
firmness,  that  it  would  not  only  be  maintained,  but  even 
accentuated,  until  it  should  approach  or  even  reach  the  pro- 
posed ratio  of  i  to  32." 2 

Referring  to  the  question  as  to  what  ought  to  be  done  — • 
if,  subsequent  to  the  putting  into  operation  of  the  monetary 
reform  measures,  the  gold  price  of  silver  were  to  rise  to  a 
point  at  which  the  bullion  value  of  the  new  peso  should 
become  equal  to,  or  even  exceed,  legal  parity  —  the  fifth 
subcommission  said : 

"  Such  a  contingency  cannot  be  judged  impossible,  when  one 
considers  the  surprises  which  the  constant  fluctuations  in 
silver  have  so  often  given  to  those  who  are  best  informed 
and  most  foresighted  on  the  subject.  For  the  solution  of 
the  problem  there  would  be  only  two  possible  courses. 
Either  to  alter  the  legal  parity  ...  or  to  go  frankly  and 
openly  to  a  gold  standard  with  the  circulation  of  gold  coin. 
Since  the  inconveniences  of  the  former  course  leapt  before 
us  with  all  their  sinister  consequences,  we  accepted  with- 
out disagreement  or  hesitation  the  second  plan,  making  it 
the  twelfth  base  in  the  plan  of  reform."3 

This  base  recommended  that  under  such  a  contingency 
the  Government  should  immediately  demonetize  the  silver 

1  See  chart,  p.  535. 

2  Com.  Mon.  Mex.,  Actas,  etc.,  p.  197. 

3  Ibid.,  p.  200. 


HOW  THE  PLAN  WORKED  541 

peso,  and  introduce  into  the  monetary  system  the  gold 
standard  with  free  coinage  of  gold  and  gold  in  circulation.1 

On  November  16,  1904  Finance  Minister  Limantour  in 
submitting  to  Congress  the  proposed  enabling  Act  said : 

"For  some  months  exchange  rates  on  New  York  have  rep- 
resented a  gold  value  to  the  peso  of  from  46  to  47  cents ; 
although  the  price  of  bar  silver  has  been  relatively  lower. 
Since,  on  the  other  hand,  the  tendencies  of  the  white  metal 
are  not  in  the  direction  of  its  being  much  dearer,  for  there 
is  no  prospect  either  that  its  production  will  be  diminished, 
or  that  the  demand  for  it  will  be  suddenly  increased  in  any 
strong  proportions,  the  present  margin  between  the  bullion 
value  of  the  peso  and  the  money  value  which  we  are  under- 
taking to  give  it  in  our  new  monetary  system,  is  sufficiently 
ample  to  remove  the  fear,  at  least  for  some  time,  that  se- 
rious disturbances  may  arise  from  an  advance  in  the  bullion 
value  of  the  peso  above  its  legal  parity.  On  the  other  hand, 
the  margin  is  not  so  large  as  to  inspire  doubts  that  the  peso 
may  not  be  able  to  be  raised  without  difficulty  to  the  legal 
gold  parity."  2 

Despite  this  confidence,  the  Finance  Minister  had  taken 
precautionary  measures;  for  the  bill  which  he  submitted 
to  Congress  in  November  1904,  and  which  later  became 
the  Gold-Standard  Enabling  Act,  gave  the  Executive  au- 
thority "to  permit  the  legal  circulation  for  a  limited  period 
of  the  gold  coins  of  other  nations,  fixing  their  value  in 
Mexican  money,  in  case  the  price  of  standard  silver  per 
ounce  in  London  should  rise  above  28id.,"  the  bullion  par 
being  28ffd. ;  and  "to  demonetize  coins  which  in  his 
judgment  should  be  retired  from  circulation" ;  to  have  gold 
coined  when  he  saw  fit;  and  "to  modify  civil  and  mer- 
cantile legislation  in  all  matters  connected  with  loans  and 
the  payments  of  money." 

1  Ibid.,  p.  203. 

2  Leyes  y  Dispos.,  etc.,  pp.  24-25. 


542          THE  MEXICAN  CURRENCY  REFORM,   1903-08 

Measures  to  Protect  the  Monetary  Circulation.  With  the 
high  profits  realizable  from  the  exportation  of  silver 
pesos,  which  the  bullion  values  of  the  peso  after  October 
1905  suggest,  one  would  have  expected  bullion  dealers 
everywhere  to  collect  pesos  and  to  export  them  in  large 
quantities.  To  prevent  this  the  Commission  on  Exchange 
and  Money  wisely  undertook  to  keep  in  its  own  control 
the  matter  of  exporting  pesos.  Its  problem  and  how  it 
solved  it  may  best  be  told  in  the  words  of  its  own  admirable 
report.1 

11  The  Commission  immediately  decided  to  take  advantage 
of  such  a  favorable  conjuncture  to  undertake  the  task  of 
demonetizing  the  Mexican  peso,  converting  into  gold  the 
silver  which  it  contained.  ...  In  order  to  accomplish 
this  end  it  would  be  necessary  to  proceed  very  rapidly,  since 
it  was  impossible  to  predict  how  long  the  advance  in  silver 
would  continue ;  and  at  the  same  time  with  great  caution, 
since  it  is  known  that  the  silver  market  is  exceedingly  sensi- 
tive, and  the  offer  of  silver  even  by  a  very  small  am6unt  in 
excess  of  the  demands  of  the  day  is  sufficient  to  depress  the 
market  to  a  considerable  degree.  Without  precipitation, 
therefore,  but  with  inviolable  firmness,  following  the  fluctua- 
tions of  the  market  closely  and  with  anxious  interest,  the 
Commission  began  to  realize  upon  the  pesos  which  it  held 
in  the  Regulator  Fund.  When  it  had  disposed  of  these  at 
remunerative  prices,  which  happened  soon,  it  made  an 
arrangement  with  the  banks  according  to  which  they 
undertook  to  turn  over  to  the  Commission  their  cash 
balances  of  pesos  upon  condition  that  they  should  realize 
upon  them  in  London  without  loss,  notwithstanding  the 
great  diversity  of  places  in  which  the  money  was  gathered. 
"  It  was  the  invariable  rule  of  the  Commission  in  the 
numerous  operations  of  this  kind  which  it  undertook,  to 
turn  over  all  or  nearly  all  the  margin  of  profit  which  it 
realized  to  the  banks  which  furnished  the  pesos  for  exporta- 

1  Memoria  de  la  Comision  de  Cambios  y  Moneda,  que  Comprende  el 
Periodo  Transcurrido  de  lo  de  Mayo  de  1905  a  30  de  Junio  de  1909,  pp.  12-14. 


HOW  THE  PLAN  WORKED  543 

tion,  since  it  appeared  that  by  proceeding  in  this  way  it 
not  only  complied  with  the  demands  of  justice  but  best 
accomplished  the  purpose  for  which  the  Commission  was 
created.  That  purpose  was  not  to  secure  profit,  but  to 
contribute  to  the  establishment  and  maintenance  of  the 
monetary  circulation  of  the  Republic  upon  sound  and  stable 
bases. 

"  Another  object  pursued  at  the  same  time  by  the  Com- 
mission in  its  conduct  of  this  affair  was  to  prevent  banks  and 
individuals  from  becoming  interested  in  undertaking  di- 
rectly operations  for  the  exportation  of  pesos.  To  this 
end  the  services  of  the  Commission  were  made  essentially 
gratuitous.  Thus  the  Commission  prevented  disturbances 
in  the  silver  market  which  without  doubt  would  have  taken 
place  if  the  offerings  of  Mexico  had  been  multiplied  in  a 
disorderly  manner  and  had  not  been  turned  into  one 
channel,  attention  always  being  given  to  the  circumstances 
of  the  moment.  The  Commission  furthermore  enjoyed 
facilities  for  conducting  the  business  quickly,  effectively,  and 
cheaply,  which  were  not  available  to  all  exporters." 

In  this  manner  the  Commission  exported  from  Novem- 
ber 17,  1905  to  September  24,  1907  the  important  sum  of 
P  60,727,500,  from  which  it  was  able  to  realize  upon  all 
but  P  2,7io,ooo.1 

Notwithstanding  all  the  efforts  which  have  been  alluded 
to,  for  conserving  the  Commission's  control  over  the  ex- 
portation of  pesos,  it  continually  feared  that  a  time  would 
arrive  when  its  control  would  disappear,  because  it  was  cer- 
tain that  if  the  high  price  of  silver  should  persist,  the  spirit 
of  gain  and  of  speculation  would  induce  many  to  undertake 
operations  on  their  own  account.  The  danger  then  would 
consist  not  only  in  the  disturbances  which  would  thereby  be 
caused  in  the  market  for  the  purchase  of  silver,  but  also 
in  the  rapid  retirement  from  circulation  in  the  Republic  of 

1  Before  this  latter  sum  could  be  realized  upon  the  price  of  silver  declined 
so  far  that  it  became  desirable  for  the  Commission  to  have  the  coins  returned 
to  Mexico. 


544          THE  MEXICAN  CURRENCY  REFORM,   1903-08 

large  sums  of  pesos,  thus  producing  quickly  a  dangerous 
contraction  in  the  currency,  since  individuals  would  not 
find  it  to  their  interest  to  follow  the  invariable  practice 
of  the  Commission  of  returning  to  the  circulation  in 
the  form  of  gold  the  equivalent  of  the  silver  coins  with- 
drawn. 

When  in  October  and  November  1906  the  price  of  silver 
rose  to  an  average  of  11.2  per  cent  and  13.0  per  cent,  re- 
spectively, above  bullion  par,  the  exportation  of  silver  pesos 
became  so  profitable  "that  commercial  people  of  every  class 
and  persons  not  engaged  in  commerce  undertook  their  ex- 
portation." 1  Figures  cited  by  the  Commission  show  that 
nearly  sixteen  million  pesos  were  exported  by  private 
parties  prior  to  November  19,  1906? 

Now  we  find  Mexico's  currency  problem  reversed.  It  is 
no  longer  the  problem  of  creating  a  scarcity  of  money  so  as 
to  raise  the  value  of  the  peso  to  the  gold  par  of  75  centi- 
grams of  pure  gold,  but  the  problem  of  preventing  a  cur- 
rency scarcity  and  of  keeping  the  peso  down  to  the  gold 
par  for  purposes  of  circulation.  On  every  side  fears  were 
expressed  lest  the  country  would  be  denuded  of  its  currency 
supply.  The  situation  was  made  more  serious  by  the  facts 
that  (i)  at  the  time  the  pesos  were  being  exported  subsidiary 
coins  were  being  withdrawn  from  circulation  and  recoined, 
also  minor  coins  of  nickel  and  copper;  and  that  (2)  there 
were  in  force  strict  limitations  upon  additional  issues  of 
bank  notes  which  had  been  imposed  to  prevent  an  increase 
of  bank-note  circulation  from  interfering  with  the  "rela- 
tive contraction  of  the  currency." 

On  November  19,  1906  a  ten  per  cent  duty  was  imposed 
upon  the  face  value  of  silver  coins  exported,  with  the  pro- 
viso that  exporters  would  be  exempted  from  the  tax  if 
within  thirty  days  of  the  date  of  shipment  they  should  turn 
over  to  the  Commission  for  gratuitous  coinage  gold  bars  or 
foreign  gold  coins  equivalent  in  value  at  the  legal  parity  to 
1  Hegemann,  pp.  173-74-  z  Memoria,  etc.,  p.  15. 


HOW  THE  PLAN  WORKED  545 

the  pesos  exported.  There  were  exported,  in  accordance 
with  the  provisions  of  this  law,  down  to  the  close  of  the 
fiscal  year  1907-08,  P  8, 264,447, 1  which,  added  to  the  net 
exportations  made  by  the  Commission  for  which  gold  was 
returned,  total  over  P66,ooo,ooo.2 

The  next  step  was  to  make  every  effort  to  expedite  the 
coinage  of  all  new  kinds  of  Mexican  money,  gold,  silver, 
nickel,  and  copper.  To  this  end  not  only  was  the  Mexican 
mint  worked  to  its  full  capacity,  but  the  mints  of  other 
countries  3  were  also  employed  under  the  supervision  of 
representatives  of  the  Mexican  Government.  The  amount 
coined  at  foreign  mints  was  P  41, 6 10,123,  and  at  the  Mexican 
mint  P  86,345,647,  making  a  total  coinage  down  to  June 
30,  1909  of  1*127,955,770  and  representing  86.5  per  cent 
of  the  total  metallic  money  of  the  country.  To  take  the 
place  of  the  pesos  which  were  being  exported  the  Govern- 
ment coined  a  large  number  of  5o-cent  pieces,4  which  were 
highly  popular  coins  and  not  of  sufficient  bullion  value  to 
be  exportable. 

Two  measures  adopted  in  1905,  before  the  rise  in  the  price 
of  silver  had  resulted  in  the  exportation  of  much  silver  coin, 
proved  helpful  in  the  effort  to  provide  promptly  an  adequate 
gold  circulation. 

The  first  was  an  Act  to  encourage  the  keeping  of  domesti- 
cally produced  gold  at  home.  Mexico  is  an  important  gold- 
producing  country  (ranking  only  after  South  Africa,  the 
United  States,  and  Russia  in  1908),  and  fortunately  her 
product  was  increasing  at  the  time  the  monetary  reform 

1  Ibid.,  p.  14. 

2  On  June  30, 1909  it  was  officially  estimated  that  there  was  still  in  Mexico 
about  twenty  million  of  the  old  silver  pesos  out  of  a  total  metallic  monetary 
stock  of  147,950,242  pesos.     Ibid.,  p.  17. 

3 The  foreign  mints  employed  were  those  of  Birmingham,  England; 
Philadelphia  (which  coined  30,000,000  pesos  of  gold  coin) ;  New  Orleans ; 
Denver ;  and  San  Francisco.  Detailed  figures  for  the  coinage  will  be  found 
in  Memoria,  etc.,  App.  No.  7. 

4  Out  of  a  total  new  silver  coinage  of  P42,728,543,  P  26,830,619  or  62.8 
per  cent  consisted  of  5o-cent  pieces.  Ibid. 

2N 


546          THE  MEXICAN  CURRENCY  REFORM,   1903-08 

was  being  effected.1  An  Act  of  June  19,  1905  reduced  the 
stamp  tax  upon  the  value  of  bars  of  gold  (as  well  as  of  silver) 
refined  to  a  fineness  of  .999  or  more,  from  i\  per  cent  to  i  \ 
per  cent.2  It  is  interesting  to  note  that  domestic  gold  to 
the  value  of  over  P  5 2, 000,000  was  purchased  by  the  Com- 
mission in  the  form  of  bars  down  to  the  close  of  the  fiscal 
year  i909-3 

The  second  measure  was  the  adoption  of  the  temporary 
expedient  of  issuing  gold  certificates  against  gold  bullion 
in  process  of  coinage.  These  certificates  were  authorized 
in  the  decree  of  December  22,  1905^  and  their  principal 
characteristics  are  well  summarized  by  Sobral  as  follows : 

The  certificates  were  issuable  "in  exchange  for  gold  bars  or 
foreign  gold  coins  received  for  coinage ;  or  in  exchange  for 
silver  pesos  received  for  sale,  the  proceeds  of  which  were  to  be 
turned  into  gold.  They  were  payable  to  bearer  at  sight,  but 
at  the  request  of  the  interested  parties  might  be  made  pay- 
able to  order.  Certificates  were  issued  in  denominations 
of  a  thousand  pesos  or  multiples  thereof,  except  when  they 
were  made  payable  to  order ;  but  in  no  case  in  denomina- 
tions of  less  than  a  thousand  pesos.  They  were  redeemable 

1  According  to  the  estimates  of  the  Director  of  the  United  States  Mint, 
Mexico's  annual  gold  product  in  terms  of  United  States  money  at  this  time 
was  as  follows:   1905,  $16,107,100;   1906,  $18,534,700;   1907,  $18,681,100; 
and  1908,  $22,371,200. 

2  Cf.  Memoria,  etc.,  p.  20. 

3  Ibid.,  Appendix  9. 

4  "In  accordance  with  the  wording  of  the  decree  the  Commission  must  at 
all  times  keep  in  the  National  Bank  gold  to  the  amount  of  the  gold  certifi- 
cates issued.    This  it  could  do  by  means  of  the  money  in  the  Regulator  Fund. 
Doubtless  the  Commission  felt  secure  against  a  crisis,  since  the  amount  of  the 
certificates  issued  was  already  held  in  the  form  of  United  States  gold  coin, 
and  the  Executive  had  authority  from  the  Gold-Standard  Act  to  make  foreign 
gold  money  legal  tender  at  any  time.     For  national  reasons  it  was  decided  not 
to  adopt  such  a  course  unless  necessary.     (Cf.  Memoria,  etc.,  p.  16.)     In 
case  of  the  sudden  presentation  of  gold  certificates,   however,  redemption 
might  be  made  in  gold  coin  of  the  neighboring  Republic,  which  enjoyed  a 
good  reputation  in  Mexico,  and  which,  if  made  a  legal  means  of  payment, 
could  be  substituted  for  the  new  Mexican  peso,  since  the  American  dollar 
was  worth  almost  exactly  two  Mexican  pesos."    Hegemen,  pp.  172-73. 


HOW  THE  PLAN  WORKED  547 

on  demand,  the  Commission  having  the  option  to  redeem  in 
Mexican  gold  coin  or  in  foreign  gold  coin ;  and  the  Commis- 
sion kept  a  deposit  in  gold  bars  as  a  guaranty  fund.  Banks 
were  authorized  to  count  certificates  as  part  of  their 
reserves."  *  Although  legally  free  coinage  of  gold  did  not 
exist,  this  issue  of  certificates  in  exchange  for  gold  bullion 
amounted  to  nearly  the  same  thing ;  and  as  a  matter  of  fact 
all  gold  presented  was  freely  coined  by  the  Commission. 

The  restrictions  upon  the  bank-note  circulation  were 
relaxed;  and  the  total  circulation  increased  from  P8Q.5 
millions  August  31,  1905  to  Pg6.o  millions  November  30, 
1906.  The  National  Bank  of  Mexico  alone  increased  its 
circulation  from  P25.o  millions  to  P34.o  millions.2 

Final  Results 

The  measures  just  described  proved  effective.  They 
provided  the  mechanism  by  which  the  great  but  tem- 
porary rise  in  the  price  of  silver  during  1905-07  carried 
Mexico  quickly  and  unexpectedly  to  the  gold  standard, 
yielded  a  net  profit  of  P  8  millions,3  solved  the  vexed  prob- 
lem of  a  gold  reserve,  eliminated  the  necessity  of  the  gold- 
exchange  standard,  and  transferred  the  country's  stock  of 
metallic  money  in  a  little  over  three  years'  time  from  one 
consisting  almost  entirely  of  silver  coins  to  one  in  which 
P83  millions4  out  of  a  total  of  Pi 48  millions  were  gold, 
and  in  which  Pi 28  millions  represented  new  coins.6 

The  story  of  the  subsequent  breakdown  of  this  care- 
fully constructed  gold  standard  during  Mexico's  recent 
unfortunate  years  of  revolution  does  not  fall  within  the 
province  of  this  paper,  nor  are  the  materials  yet  avail- 
able to  make  possible  an  account  of  it  that  would  be  of 
any  scientific  value. 

1  Sobral,  pp.  191-92. 

2  Economista  Mexicano,  Sept.  30,  1905,  p.  589,  and  Jan.  5,  1907,  p.  304. 
8  Memoria,  etc.,  Appendix,  p.  n.          4  Ibid.,  pp.  14-16.         6  Ibid.,  p.  7. 


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APPENDIX  B 

THE  MEXICAN  CURRENCY  REFORM 
Principal  References  Cited 

ANDREW,  A.  PIATT.  The  End  of  the  Mexican  Dollar.  Quarterly 
Journal  of  Economics,  XVIII,  1,904,  pp.  321-56. 

British  Diplomatic  and  Consular  Reports.  Annual.  London: 
British  Blue  Book. 

CASASUS,  JOAQUIN  D.  La  Question  de  FArgent  au  Mexique. 
Materiaux  Presentes  par  Joaquin  D.  Casasus,  Delegue  du  Gou- 
vernement  Mexicain  a  la  Conference  Internationale  Monetaire  de 
Bruxelles.  Paris,  1892. 

.    La  Reforma  Monetaria  en  Mexico.    Mexico  City :  Imprenta 

de  Hull,  1905. 

Comision  de  Cambios  Internationales  de  la  Republica  Mexicana. 
Memorandum  of  Conference  between  Delegations  for  the  United 
States,  China,  Mexico,  and  Representatives  of  Great  Britain, 
June  1903.  Mexico  City:  Government,  1903. 

Comision  Monetaria,  Mexico.  Actas  de  las  Juntas  Generates  y 
Documentos  a  Ellas  Anexos.  Mexico  City:  Government,  1904. 

.  Datos  Complementarios  para  el  Estudio  de  la  Cuestion  Mone- 
taria en  Mexico.  Mexico  City:  Government,  1903. 

.    Datos  para  el  Estudio  de  la  Cuestion  Monetaria  en  Mexico. 

Mexico  City:   Government,  1903. 

.     Datos  sobre  Rentas  de  Fincas  Urbanas  en  la  Ciudad  de 

Mexico.     Mexico  City:  Government,  1903. 

.     Estadistica  Bancaria.     Mexico  City:  Government,  1903. 

CONANT,  CHARLES  A.  The  Banking  System  of  Mexico.  National 
Monetary  Commission.  6ist  Congress,  2d  Sess.,  Senate  Docu- 
ment, No.  493.  Washington :  Superintendent  of  Documents, 
1910. 

.     Influence  of  Falling  Exchange  upon  the  Returns  Received  for 

National  Products.  Argument  Submitted  by  Messrs.  Charles 
A.  Conant,  Jeremiah  W.  Jenks,  and  Edward  Brush  to  the  Mone- 
tary Commission  of  the  Republic  of  Mexico.  London :  A.  E. 
Bailey,  1903. 

550 


APPENDIX  B  551 

Datos  Estadisticos  Preparados  por  la  Secretaria  de  Hacienda  y 
Credito  Publico  Especialmente  para  el  Estudio  de  la  Cuestion 
Monetaria.  Mexico  City:  Government,  1903. 

Diario  Official,  Mexico.      Government.    Passim. 

Director  of  the  Mint.  Annual  Reports.  Washington:  Superin- 
tendent of  Documents. 

Economista  Mexicano ;  Seminario  de  Asuntos  Economicos  y  Es- 
tadisticos. City  of  Mexico:  Tipografia  de  "El  Gran  Libro." 
Passim. 

FAVRE,  JEAN.  Les  Banques  au  Mexique,  Organisation  et  Devel- 
oppement.  Paris :  Marcel  Riviere,  1907. 

GAINES,  MORRILL  W.    Effects  of  the  Silver  Standard  in  Mexico. 

Yale  Review,  XII,  1903,  pp.  276-89. 

— .     The  Price  of  Silver.     Yale  Review,  XIV,  1905,  pp.  18-37. 
— .     The  Problem  of  Monetary  Reform  in  Mexico  —  A  Sugges- 
tion.    Yale  Review,  XII,  1903,  pp.  346-59. 

GLONER,  PROSPER.  Les  Finances  de  fitats  Unis  Mexicaines. 
Berlin  :  Puttkamer  &  Miihlbrecht,  1896. 

HEGEMANN,  WERNER.  Mexikos  Ubergang  zur  Goldwahrung.  Stutt- 
gart und  Berlin :  J.  G.  Cotta'sche  Buchhandlung  Nachfolger, 
1908. 

International  Bureau  of  the  American  Republics.  Mexico,  Geo- 
graphical Sketch,  Natural  Resources,  Laws,  Economic  Condi- 
tions, Actual  Development,  Prospects  of  Future  Growth,  1904. 
58th  Congress,  3d  Sess.,  House  Documents,  LXVI,  No.  145, 
Part  5.  Washington :  Superintendent  of  Documents,  1904. 

International  Monetary  Conference  Held  in  Paris  in  1878.  Report. 
Washington :  Superintendent  of  Documents,  1879. 

JOHNSON,  JOSEPH  FRENCH.  Money  and  Currency.  Boston:  Ginn 
&  Co.,  1906. 

KAERGER,  KARL.  Landwirtschaft  und  Kolonisation  in  Spanischen 
Amerika.  2  Volumes.  Leipzig:  Duncker  &  Humblot,  1901. 

KEMMERER,  E.  W.  The  Recent  Rise  in  the  Price  of  Silver  and 
Some  of  its  Monetary  Consequences.  Quarterly  Journal  of 
Economics,  XXVI,  1912,  pp.  215-84. 

Leyes  y  Disposiciones  Relativas  a  la  Reforma  Monetaria.  Mexico 
City:  Government,  1906. 

Memoria  de  la  Comision  de  Cambios  y  Moneda,  que  Comprende  el 
periodo  Transcurrido  de  i  de  Mayo  de  1905  a  30  de  Junio  de  1909. 
Mexico  City:  Government,  1909. 

Mexico  and  the  Silver  Problem.  The  Economist,  London,  December 
13,  1902,  pp.  1930-31. 

Money  and  Prices  in  Foreign  Countries.     Special  Consular  Report, 


552  THE  MEXICAN  CURRENCY  REFORM,   1903-08 

XIII,  Part  I.     54th   Congress,   2d   Sess.,  House   Documents, 

No.  25. 
NASSE,  E.     Das  Sinken  der  Warenpreise  wahrend  der  letzten  fiinfzehn 

Jahre.     Jahrbuch  fur   Nationaloekonomie   und    Statistik,  neue 

Folge,  Bd.  17,  1888,  pp.  50-66  and  129-81. 
ROMERO,  MATIAS.     Mexico  and  the  United   States.    New  York: 

G.  P.  Putnam's  Sons,  1898. 
SOBRAL,  ENRIQUE  MARTINEZ.    La  Reforma  Monetaria.     2  Edicion. 

Mexico  City :  Tipografia  de  la  Oficina  Impresora  de  Estampillas, 

1910. 
SUMNER,   W.   J.     The   Spanish  Dollar  and  the   Colonial  Shilling. 

American  Historical  Review,  III,  1898,  pp.  617-19. 
United   States   Consular   Reports.     Mexico.    Washington:    Super- 
intendent of  Documents.     Passim. 
VIOLLET,  EUGENE.    Le  Probleme  de  1'Argent   et  PEtalon   d'Or  au 

Mexique.     Paris :  Giard  et  Briere,  1907. 
WEYL,  WALTER  E.    Labor  Conditions  in  Mexico.     Bulletin  of  the 

Department   of   Labor,  No.   38,  January   1902.     Washington: 

Superintendent  of  Documents. 


INDEX 


Accounting  difficulties  of  Government 
under  dual  standard  in  Philippines, 
288-290. 

Adams,  Frank  Forbes,  on  silver  and 
India's  home  charges,  22. 

Adamson,  W.,  appointed  member  of 
Straits  Currency  Committee,  396. 

Aguilar  y  Biosca,  cited,  246,  247,  248. 

Alfonsino  peso  coined  for  Philippines, 
249. 

Allen,  Charles  H.,  quoted,  217-218. 

American  soldiers,  number  of,  in  Philip- 
pines, 1898-1900,  254-255. 

Anderson,  John,  Governor  of  Straits 
Settlements,  quoted,  415-416,  419. 

Andre"ades,  A.,  cited,  513. 

Andrew,  A.  Piatt,  mentioned,  3,  467,  504. 

Appreciation  of  gold  or  depreciation  of 
silver,  1873-1893?  17-22. 

Appreciation  of  rupee,  1893-1898,  ex- 
tent of,  56-62 ;  and  interest  rates  in 
India,  1893-1903,  66-69. 

Atkinson  price  index  numbers  for  India, 
57-59,  68. 

Balfour,  Lord,  cited,  on  bimetallism  for 
India,  74-75. 

Bank  of  England,  Resumption  Act  for, 
of  1819,  cited  in  connection  with 
Lindsay  plan  for  India,  80;  as  a 
depository  for  Indian  reserve  funds, 
129,  131-132;  Governor  of,  quoted, 
131-132. 

Bank  of  Porto  Rico,  bank  notes  of,  trans- 
ferred to  a  U.  S.  currency  basis  and 
put  in  circulation,  205. 

Bank  notes,  in  India,  privilege  of  issuing 
withdrawn  in  1861,  9;  in  Porto  Rico, 
transferred  to  a  U.  S.  currency  basis, 
205;  in  Mexico,  restrictions  placed 
upon,  during  period  of  currency  reform, 
526-530. 

Banks  of  Manila,  agree  to  maintain 
exchange  at  not  lower  than  "  2  to  i " 


for  privilege  of  importing  Mexican 
pesos  freely,  267-268;  cooperate  with 
Philippine  Government  in  withdraw- 
ing local  currency  from  circulation, 
334-335  J  unwillingness  of,  to  receive 
U.  S.  currency  deposits  from  public, 
383-385. 

Barbour,  Sir  David,  cited,  17,  40,  48-49; 
criticizes  Lindsay  plan,  91 ;  appointed 
chairman  of  Straits  Currency  Com- 
mittee, 396. 

Barnes,  Charles  Ilderton,  cited,  304. 

Bengal  Chamber  of  Commerce  in  1892 
favors  inquiry  looking  toward  gold 
standard  for  India,  n. 

Bernard,  Sir  Charles  Edward,  cited,  31. 

Bibliography,  of  Indian  currency  re- 
form, 149-152;  of  Porto  Rican  cur- 
rency reform,  230-241 ;  of  Philippine 
currency  reform,  386-388;  of  Straits 
Settlements  currency  reform,  462- 
463;  of  Mexican  currency  reform, 
550-552. 

Bimetallism,  advocated  for  India  in 
1898,  74-75;  rejected  by  Fowler 
Committee,  75 ;  the  legal  monetary 
system  in  Mexico  to  1904,  472.  See 
Quasi  Bimetallism. 

Black  pepper,  price  of,  how  affected  by 
"raising"  of  Straits  dollar,  431-432. 

Elaine,  W.,  appointed  member  of  Straits 
Currency  Committee,  396. 

Blair  and  Robertson,  cited,  245. 

Boxer  trouble  in  China,  influence  of,  on 
gold  value  of  Mexican  peso  in  Philip- 
pines, 269. 

British  consular  official,  cited,  in  Porto 
Rico,  181,  212,  220,  221;  in  Manila, 
252. 

British  dollar,  proposal  to  introduce  in 
Philippines  rejected,  274-275;  cir- 
culation of,  in  Straits  Settlements,  391. 

Brush,  Edward,  cited,  296,  480. 

Brussels  Monetary  Conference,  11-13. 


553 


554 


INDEX 


Budgetary  difficulties,  in  India  under 
silver  standard,  14—23 ;  in  Philip- 
pines under  silver  standard,  281—290; 
in  Mexico  under  silver  standard,  476; 
partly  met  in  Mexico  by  sliding  scale 
of  customs  duties,  476—477. 

Bulnes,  Francisco,  cited,  483. 

Calcutta  Chamber  of  Commerce,  men- 
tioned, 7. 

Canje,  Spanish  word  used  to  designate 
the  substitution  of  U.  S.  currency  for 
local  currency  in  Porto  Rico,  161,  205  ; 
influence  of  canje  on  debts,  210,  on 
foreign  trade,  210-212,  on  prices,  212- 
219,  on  rents,  219-220;  on  wages, 
220-222 ;  were  price  and  wage  changes 
permanent?  223-224. 

Carroll,  Henry  K.,  Commissioner  of 
U.  S.  Government  to  Porto  Rico,  cited, 
159,  165,  172,  190,  208,  223. 

Casasus,  Joaquin  D.,  cited,  469,  506,  515, 
537- 

Castellano,  Tomas,  cited,  160,  161-162, 
164. 

Ceylon  tea  industry,  influenced  by 
price  of  silver,  25-26. 

Chalmers,  Robert,  cited,  4,  5,  6,  7,  9. 

Chart,  showing  monthly  variations  in 
exchange  and  bullion  values  of  rupee 
in  India,  1889-1899,  50,  of  Mexican 
peso  in  Porto  Rico,  1890-1895,  158, 
of  Porto  Rican  peso,  1896-1900,  167, 
of  Mexican  peso  in  Philippines,  1893- 
1904,  251,  of  Philippine  peso,  1904- 
1907.  353.  of  Straits  dollar,  1901-1909, 
408,  of  Mexican  peso  in  Mexico,  1901- 
1909,  535- 

Cheetham,  W.  H.,  cited,  49,  53,  76. 

Christie,  Thomas,  cited,  76. 

"Circles,"  paper  currency,  in  India,  de- 
nned, 9. 

Circulation,  monetary,  increased  in 
India  during  period  of  closure  of  mints, 

52-54- 

Closing  of  mints  to  free  coinage  of  silver 
in  India  contingently  favored  by  In- 
dian Government,  12-13. 

Coinage  system  on  gold  standard,  pro- 
posed for  Philippines,  306;  early 
formulation  of  plan  by  Philippine 
Commission,  307-308 ;  repeatedly 
urged  on  Congress  by  Philippine 
Commission,  310-311. 


Cole,  Alfred  Clayton,  Governor  of  Bank 
of  England,  cited,  131-132. 

Coll  y  Toste,  Cayetano,  cited,  156,  163. 

Commission  on  Exchange  and  Money, 
established  in  Mexico,  532;  takes 
vigorous  measures  to  protect  Mexican 
peso  in  Mexico  from  melting  pot,  542- 
547- 

Commission  on  International  Exchange, 
cited,  470-480,  495-496. 

Commodities,  early  used  as  money  in 
Philippines,  245. 

Company's  rupee,  name  changed  to 
government  rupee  in  India,  5. 

Conant,  Charles  A.,  cited,  224,  296,  304, 
308,  349,  480,  496,  527. 

"Conant,"  meaning  of  term  as  applied 
to  Philippine  currency  in  1903-1905, 
33i. 

Confusion  caused  by  various  rates  of 
exchange  in  Porto  Rico,  171—174. 

Contraction  of  currency  in  India,  1893— 
1898,  absolute  or  only  relative  ?  70—71 . 

Contracts  in  local  currency,  provision 
made  for  settlement  of,  when  local 
currency  is  withdrawn  from  circulation 
in  Philippines,  340—342. 

Conversion  of  Porto  Rican  currency  into 
U.  S.  currency,  question  of  an  equi- 
table rate  for,  178-193. 

Convertibility  of  rupees  into  gold  on 
demand,  attitude  of  Royal  Commis- 
sion on,  134-135. 

Cooper,  Henry  A.,  mentioned,  309,  311. 

Correlation  coefficient,  between  bullion 
value  and  money  value  of  rupee,  1894, 
51 ;  between  value  of  Mexican  peso 
and  Mexico's  exports,  1884-1902,  490- 
492. 

Corwine,  William  R.,  cited,  169. 

Council  bills,  Indian,  described,  36-37 ; 
sale  of,  practically  suspended  in  1893  by 
Secretary  of  State,  30-41 ;  influence  of 
suspension,  on  export  trade,  42-43,  on 
importation  of  silver,  43-47,  on  Indian 
government  finances,  47-48;  sale  of, 
again  practically  suspended  early  in 
crisis  of  1907-1908,  115-116. 

Counterfeiting,  alleged  danger  of,  in 
Porto  Rico,  228;  feared  in  case  of 
slow  conversion  to  U.  S.  currency  in 
Porto  Rico,  197-198;  alleged  danger 
of,  for  U.  S.  coins  in  Philippines,  305. 

Credit    conditions  in  Porto    Rico    and 


INDEX 


555 


amount  of  outstanding  indebtedness 
in  1899,  181-183,  189. 

Creel,  Enrique,  mentioned,  497. 

Crisis  of  1907—1908  in  India,  113—123; 
Indian  Government's  currency  policy 
during,  criticized,  120-123;  effect  of, 
upon  India's  monetary  reserves,  118- 
119. 

Criticism  of  Porto  Rican  currency  reform 
plan,  225-235. 

"  Crore,"  meaning  of  term,  17. 

Currency  notes,  net  circulation  of,  in 
India,  annually,  1898-1908,  100; 
issued  against  sovereigns  and  later 
against  silver  bullion  deposited  in 
London,  100-104;  currency  notes  of 
Straits  Settlements  described,  450—452. 

Currency  Note  Commissioners  of  Straits, 
451- 

Currency  Note  Guarantee  Fund,  of 
Straits,  451-452 ;  decline  in  gold  value 
of,  caused  by  "raising"  of  Straits  dol- 
lar, 452. 

Currency  reform,  in  India,  agitation  for, 
7-8;  period  of  agitation  divided  into 
three  parts,  8 ;  currency  reform  plan, 
India,  adopted  in  1893,  32-34.  See 
also  table  of  contents. 

Davis,  General  George  W.,  cited,  156, 
162,  163,  164,  176,  179,  208,  214,  217, 
220,  221,  230. 

Debtor  and  creditor,  equities  between,  in 
Porto  Rico,  180-193;  little  discussion 
of,  after  passage  of  Foraker  Act,  210; 
adjustment  of  outstanding  debts  in 
Philippines  at  time  of  currency  reform, 
3iS»  339J  how  equities  between 
debtors  and  creditors  were  affected 
by  Straits  currency  reform,  433 ; 
question  of  equities  between  debtor 
and  creditor  in  Mexican  currency 
reform,  506—508. 

Debt,  public,  of  India,  15-17 ;  of  Straits 
Settlements,  442;  of  Mexico,  474-475. 

Declining  exchange,  influence  of,  upon 
India's  export  trade,  24-28. 

De  Ford  and  Company,  bankers,  assist 
in  redemption  of  Porto  Rican  currency, 
204,  224. 

Demand  for  money,  in  India,  1893-1898, 
no  satisfactory  data  for  measuring,  54. 

Depreciation  of  silver  or  appreciation  of 
gold,  1873-1893?  17-21. 


Dinwiddie,  W.,  cited,  173. 

Discount  rates  in  India,  1888-1903,  66- 
69. 

Division  of  Currency,  created  in  Philip- 
pine Treasury,  318. 

Domestic  drafts  sold  by  Philippine 
Government,  363-364. 

Domestic  trade  in  Straits  Settlements, 
how  affected  by  currency  reform,  424- 
426. 

Domestic  wholesale  prices,  in  Porto 
Rico,  how  affected  by  currency  re- 
form, 212-213. 

Doraiswami,  S.  V.,  cited,  131. 

Drafts  on  U.  S.  subtreasuries  sold  by 
Military  Government  in  Philippines  to 
banks,  265.  See  also  Exchange,  and 
Domestic  Drafts. 

Dual  currency  used  by  Military  Govern- 
ment in  Philippines,  263-300;  diffi- 
culties of,  arising  from  different  value 
ratios  between  two  currencies,  263-266 ; 
"  2  to  i "  ratio,  efforts  of  Government 
to  maintain,  267-279;  financial  losses 
to  government  under,  282-287;  ac- 
counting difficulties  under,  288-200; 
foreign  trade  difficulties  under,  290- 
298. 

"Ear-marking"  India's  reserve  gold  at 
Bank  of  England,  131-132. 

Economic  progress  of  India,  1899—1908, 
96-99. 

Economic  results  of  Porto  Rican  cur- 
rency reform,  210-224. 

Edgeworth,  F.  G.,  cited,  10. 

Edwards,  Clarence  R.,  cited,  255,  264. 

Egozcue,  Manuel,  cited,  197. 

El  Impartial,  Spanish  newspaper  of 
Mayaguez,  P.  R.,  cited,  176,  215,  216. 

Exchange  rates,  in  India,  decline  of,  after 
closing  of  mints,  50-51 ;  explanation  of 
decline,  51-54;  how  variations^in,  are 
related  to  changes  in  price  level,  62-66 ; 
in  Philippines,  official  rates  between 
U.  S.  currency  and  local  currency, 
tabulated,  281 ;  foreign  exchange  rates 
in  Philippines,  effect  of  fluctuations  in, 
upon  import  and  export  trade,  illus- 
trated, 292-298;  exchange  rates  in 
Singapore  on  London,  1891-1901,  398; 
extreme  fluctuations  in  Singapore  ex- 
change during  currency  crisis  of  1906, 
414-415 ;  monthly  rates  in  Singapore 


556 


INDEX 


and  Hongkong  on  London,  1902-1905, 
tabulated,  460-461 ;  monthly  rates 
in  City  of  Mexico  on  New  York,  1903- 
1908,  tabulated,  549. 

Exchange,  speculation  in,  in  Porto  Rico 
in  1898,  174;  in  Straits  Settlements  in 
1905-1906,  412-415. 

Exchange  value  and  bullion  value,  of 
Porto  Rican  peso,  1890-1895,  tabu- 
lated by  months,  235-236;  same, 
1896-1900,  237-238;  same,  for  Mexi- 
can peso  in  Philippines,  1893-1904, 
charted,  251 ;  same,  for  Straits 
Settlements  dollar,  1901—1909, 
charted,  408;  same,  for  Mexican  peso 
in  Mexico,  1901—1909,  charted,  535. 

Exportation,  of  silver  coin  and  bullion, 
from  Philippines  prohibited,  355 ;  of 
silver  dollars  from  Straits  Settlements 
prohibited,  405,  of  Mexican  dollar 
from  Philippines  taxed,  275,  tax  re- 
pealed, 277-278;  exportation  of  Mexi- 
can dollars  from  Mexico  taxed,  544- 
545- 

Export  point,  of  new  Philippine  coins  in 
1905-1906,351. 

Export  trade,  of  India,  1875-1892,  23; 
was  it  stimulated  by  declining  ex- 
change? 24-28;  export  trade  of  Porto 
Rico  large  in  proportion  to  home  trade, 
192-193,  21 1 ;  export  trade  of  Straits 
Settlements,  proportions  of,  to  gold 
and  to  silver  standard  countries,  1891- 
1901,  399-400;  how  affected  by 
Straits  currency  reform,  428-433 ;  ex- 
port trade  of  Mexico,  extent  to  which 
stimulated  by  decline  in  gold  price  of 
silver,  479-483,  490-492. 

Europeans  in  India,  suffer  hardship  from 
falling  exchange  rates,  29-30. 

European  War,  measures  for  meeting 
war  emergency  as  regards  Indian  cur- 
rency, 146—147. 

Falling  exchange  rates,  in  India,  inhibit- 
ing influence  of,  on  import  trade,  26- 
28;  cause  hardship  to  Europeans  in 
Indian  service,  29-30;  influence  of, 
on  Indian  Commerce,  23-29 ;  influence 
of,  on  Mexican  Commerce,  479-483, 
490-492. 

Farrer,  T.  H.,  cited,  33. 

Favre,  J.,  cited,  473,  526. 

Fiduciary  standard,  in  Porto  Rico  prior 


to  American  occupation,  156-169;  in 
Philippines,  1877-1898,  251-253;  dis- 
continued in  Philippines,  268. 

Fifth  subcommission  of  Mexican  Mone- 
tary Commission,  work  of,  502-518. 

Fisher,  Irving,  cited,  19. 

Foraker  bill,  history  of,  199-202 ;  pro- 
visions of,  concerning  Porto  Rican 
currency,  200;  discussion  of  currency 
provisions  of,  in  Congress,  201 ;  be- 
came law  April  12,  1000,  202. 

Foreign  exchange  rates.  See  Exchange 
Rates  and  Exchange  Value. 

Foreign  trade,  of  Porto  Rico,  how  af- 
fected by  canje,  210-212;  of  Philip- 
pines, how  influenced  by  silver  stand- 
ard, 290-298 ;  proportion  of,  with  gold 
standard  and  silver  standard  countries, 
respectively,  1900  to  1903,  291— 292  ;  of 
Straits  Settlements,  with  gold  standard 
and  silver  standard  countries,  1891— 
1901,  399—400;  how  affected  by  cur- 
rency reform,  426—433 ;  of  Mexico, 
unset tlement  of,  due  to  silver  standard, 
477;  extent  to  which  benefited  by 
fall  in  gold  price  of  silver,  479-483. 
See  also  Export  Trade,  and  Import 
Trade. 

Forward  exchange  contracts,  in  Philip- 
pines, 296-298;  in  Straits  Settlements, 
411. 

Fourth  subcommission  of  Mexican  Mone- 
tary Commission,  conclusions  of,  500- 
502. 

Fowler  Committee,  occasion  of  appoint- 
ment of,  55 ;  work  of,  72-73  ;  report 
of,  72-94;  rejects  proposal  for  bi- 
metallism for  India,  75;  rejects  pro- 
posal for  India  to  return  to  silver 
standard,  77 ;  attitude  of,  toward  a 
gold  circulation  for  India,  93,  toward 
a  gold  reserve,  93—94;  favors  con- 
tinuance of  1 6d.  par,  94. 

Fractional  coins,  in  India,  5 ;  for  Philip- 
pines, provisions  concerning  in  Philip- 
pine Civil  Government  Act,  309-311. 

Fraser  and  Company,  brokers,  cited,  461. 

Fraud,  temptation  to,  caused  by  dual 
currency  system  in  Philippines,  289- 
290. 

Free  coinage  of  silver,  in  India  to  1893,  5. 

Frewen,  Moreton,  cited,  on  influence  of 
declining  exchange  upon  foreign  trade 
of  Hakodate,  Japan,  24-25. 


INDEX 


557 


Fritze,  H.  C.,  cited,  igi. 
Fritz  Lundt  &  Co.,  cited,  235. 

Gaines,  Morrill  W.,  cited,  484. 

Gambier,  price  of,  how  affected  by 
"raising"  of  Straits  dollar,  431-433. 

Gloner,  Prosper,  cited,  471,  474. 

Gold,  appreciation  in  value  of,  1873- 
1893,  19-21 ;  circulation  of,  in  India, 
encouraged  by  Government,  108-110, 
arguments  in  favor  of  encouraging, 
130—141,  arguments  against  encourag- 
ing, 141-142 ;  rupees  to  be  given  for, 
in  India,  at  rate  of  i6d.  to  the  rupee, 
35 ;  payment  of,  in  India,  by  Gov- 
ernment, in  exchange  for  rupees,  100- 
110;  payment  of,  in  exchange  for 
rupees,  temporarily  discontinued  in 
crisis  of  1007—1908,  116;  heavy 
demands  for,  in  India  in  1007-1008, 
for  hoarding,  121,  128 ;  used  in  Philip- 
pines as  money  as  early  as  1627,  245. 
See  also  Gold  Coin,  and  Gold  Reserve. 

Gold  certificates  issued  in  Mexico,  546- 
547- 

Gold  coin,  early  circulation  of,  in  In- 
dia, 4;  legal  tender  in  certain  prov- 
inces of  India,  4 ;  legal  tender  quality 
removed  from,  in  India,  in  1835, 
5-6;  amount  of,  in  circulation  in 
India,  1800-1835,  6;  efforts  of  Gov- 
ernment to  introduce  into  India's 
circulation,  6-7  ;  agitation  for  circula- 
tion of  British  sovereign  in  India,  7 ; 
coinage  of,  at  Bombay  mint,  contem- 
plated, iio-in;  movement  for  coin- 
age of,  in  India,  143-144 ;  attitude  of 
Royal  Commission  on,  144-145 ; 
driven  out  of  circulation  in  Philippines 
by  1884,  247 ;  gold  coins  of  U.  S.  and 
gold  bars  authorized  to  be  sold  and 
bought  by  Philippine  Government  for 
Philippine  coins,  322;  gold  coin  of 
U.  S.  authorized  to  be  substituted  for 
pesos  in  Philippine  silver  certificate 
reserve,  356-357 ;  gold  coins  in  Mex- 
ico, 472,  545-547- 

Gold  debt  of  India,  15-22;  of  Straits 
Settlements,  442 ;  of  Mexico  prior  to 
1904,  474-476. 

Gold  drafts,  redemption  in.  See  Gold- 
exchange  Standard,  and  Lindsay, 
A.  M. 

Gold-exchange   standard,    proposed   for 


India  and  rejected,  89-92 ;  beginnings 
of,  in  India,  100-104 ;  development  of, 
in  India,  during  crisis  of  1907-1908, 
117—118,  122—123;  established  in 
Philippines,  310-320;  functioning  of, 
in  Philippines,  explained,  319-322 ; 
beginnings  of,  in  Straits  Settlements, 
417;  principle  of,  rejected  in  Straits 
Settlements,  410-420;  reasons  given 
in  Straits  Settlements  for  rejection  of, 
discussed,  420—422 ;  gradually  adopted 
in  Straits,  452,  453~4S8;  how  func- 
tions in  Straits,  458-459;  contem- 
plated for  Mexico,  509,  531-532. 
See  also  Lindsay,  A.  M. 

Gold  reserve,  amount  and  location  of, 
advocated  for  India  under  Lindsay 
plan,  85-89;  Gold  Reserve  Fund 
established  for  India,  104-107; 
through  influence  of  Secretary  of 
State  for  India  made  an  invested 
"secondary  reserve"  instead  of  a 
redemption  fund,  106-107;  Gold 
Reserve  Fund  in  India  transformed 
into  Gold  Standard  Reserve,  107-108; 
Gold  Standard  Reserve  in  India  before 
and  after  crisis  of  1007-1908,  119, 
found  too  small,  125-137,  location  of, 
in  London,  recommended  by  Royal 
Commission,  127-129;  larger  propor- 
tion of  gold  to  securities  needed  in 
India's  Gold  Standard  Reserve,  131- 
133;  movement  in  favor  of  keeping 
a  larger  proportion  of  India's  Reserve 
in  form  of  "ear-marked"  gold  in 
Bank  of  England,  131-132;  Gold 
Standard  Fund  authorized  for  Philip- 
pines, 318;  rates  for  drafts  sold  by 
Government  on  Fund,  319-321,  356; 
considerations  concerning  proper  size 
of  Fund  for  Philippines,  367-369;  in- 
vestment and  deposit  in  banks  of  part 
of  Fund  by  Philippine  Government, 
369-373;  criticism  of  Philippine 
Government's  recent  administration 
of  Gold  Standard  Fund,  375-382; 
gold  reserve  for  Mexico,  debate  over 
advisability  of,  508-518. 

Gold  Standard  Fund.    See  Gold  Reserve. 

Gold  standard,  proposals  for,  in  India, 
in  1893,  13;  proposals  for,  without  a 
gold  currency,  77-92 ;  proposals  for, 
in  Philippines,  and  attitude  of  dif- 
ferent classes  of  people  toward,  298- 


558 


INDEX 


299 ;  plan  for  gold  standard  for  Straits 
Settlements  recommended  by  Singa- 
pore Chamber  of  Commerce  in  1897, 
394-3Q6;  various  plans  for  introduc- 
ing, into  Straits  Settlements,  401 ; 
plan  recommended  by  Straits  Cur- 
rency Committee,  402-403;  plan 
adopted  for  Straits  Settlements,  404; 
gold  standard  system  adopted  for 
Mexico,  519-526.  See  also  table  of 
contents. 

Government  finances,  bearing  of,  on 
movement  for  establishment  of  gold 
standard,  in  India,  14-22;  in  Philip- 
pines, 281-290,  in  Straits  Settlements, 
398-399,  in  Mexico,  473-479. 

Government  notes,  in  India,  character 
of,  8-10.  See  also  Currency  Notes. 

Government  rupee,  origin  of,  in  India, 
in  1862,  5. 

Gradual  introduction  of  U.  S.  currency 
into  Porto  Rico,  favored  by  Secretary 
Gage,  194-195;  objected  to  by  many, 

195,  199- 

Greenbacks,  experience  with  in  U.  S. 
cited,  63-64. 

Greene,  General  F.  V.,  agreement  of, 
with  Manila  banks  concerning  main- 
tenance of  exchange  and  importation 
of  Mexican  pesos,  267-268. 

Gresham's  law,  how  it  operated  in  1903- 
1904  in  Philippines,  328-333. 

Gurza,  Jaime,  cited,  490-491. 

Half-cent  piece,  advocated  for  Porto 
Rico,  233. 

Hanna,  Hugh  H.,  cited,  496. 

Hanna,  Philip  C.,  cited,  195. 

Harden,  Edward  W.,  cited,  248,  301. 

Harrison,  F.  C.,  cited,  6,  9,  10,  15. 

Hegemann,  Werner,  cited,  467,  484,  487, 
521,  524,  536,  544,  546. 

Henry,  General  Guy  V.,  cited,  172,  173, 
174,  175- 

Herschell  Committee,  appointment  of, 
13;  work  of,  13-14;  defects  in  Indian 
currency  system  found  by,  14-32 ;  ac- 
cepts with  modifications  currency 
reform  plan  of  Indian  Government, 
32-33- 

Hill,  E.  J.,  cited,  304,  312. 

Hoards  and  ornaments,  in  India,  value 
of,  affected  by  closure  of  mints,  45-46. 

Hollander,  Jacob  H.,  cited,  207. 


"Home  charges,"  of  India,  in  1892, 
analyzed,  15 ;  amount  of,  increased  by 
depreciation  in  gold  value  of  silver 
from  1873  to  1893,  1 6,  21-22. 

Hongkong  and  Shanghai  Banking  Cor- 
poration, mentioned,  267,  461. 

Hunt,  William  H.,  cited,  218. 

Huttenbach,  August,  cited,  400. 

Ide,  Henry  C.,  mentioned,  308,  339. 

Importation  of  Mexican  currency  and 
other  local  currency  into  Philippines 
prohibited,  335. 

Import  trade,  of  India,  23;  of  Porto 
Rico,  193 ;  of  Straits  Settlements,  399- 
400;  of  Mexico,  482-483.  See  also 
Foreign  Trade. 

Indian  exchange  rates,  fluctuations  in, 
1880-1899,  charted,  50. 

Indian  Government,  currency  reform 
proposals  of,  in  1898,  72-73;  criticizes 
Lindsay  plan,  89 ;  proposes  to  contract 
currency  by  melting  rupees,  92-93. 

Indian  mints,  closed  to  free  coinage  of 
silver,  35-36;  proposal  to  open,  to 
free  coinage  of  gold,  iio-m,  143- 
145- 

Indian  plan  for  attainment  of  gold  stand- 
ard, favored  for  Mexico,  505. 

Indian  prosperity,  1899-1907,  causes 
large  offerings  of  gold  to  Government 
to  secure  rupees,  95-100. 

Indian  public  debt,  a  factor  in  movement 
for  gold  standard,  15-16. 

Indian  reserve  money,  loaned  in  London 
market,  130;  deposited  in  selected 
London  banks,  130-131 ;  criticism  of 
policy  of  loaning  and  depositing,  and 
charges  of  favoritism  in  regard  to,  131. 

Indian  revenues,  increase  of,  to  meet 
losses  from  falling  exchange,  difficult, 
31-32. 

Ingot  reserve,  established  in  India,  107 ; 
transferred  from  Paper  Currency 
Reserve  to  Gold  Standard  Reserve, 
108. 

Investment  of  foreign  capital,  in  Mexico, 
extent  of,  484-485 ;  different  types  of 
investments,  485-486. 

Japan,  falling  exchange  stimulates  export 

trade  in,  24—26. 
Jenks,  Jeremiah  W.,  cited,  296,  311,  480, 

496. 


INDEX 


559 


Johnson,  G.  W.,  appointed  member  of 

Straits  Currency  Committee,  396. 
Johnson,  Joseph  French,  cited,  491. 
Jones,  H.  D.  C.,  mentioned,  251. 

Kemmerer,  E.  W.,  appointed  "expert 
adviser"  to  Philippine  Government 
in  work  of  currency  reform,  317; 
appointed  Chief  of  Division  of  Cur- 
rency, 318;  cited,  28,  70,  313,  349,  538. 

Keynes,  J.  M.,  cited,  66,  70,  124,  141- 
142. 

Labastida,  Louis  G.,  mentioned,  497. 
La  Carres pondencia,  daily  newspaper  of 
San  Juan,  P.  R.,  cited,  205,  207,  208, 

209,   214,  21$,  2l6,   219,   220,   221,   222, 

228. 

La  Democracia,  daily  newspaper  of 
Ponce,  P.  R.,  cited,  215. 

Lakh,  defined,  17. 

Landero  y  Cos,  J.,  cited,  503,  540. 

Land  revenue,  Indian,  largely  fixed  by 
settlements  covering  long  periods,  31- 
32. 

Landron,  Rafael  Lopez,  cited,  155-156, 
159,  162,  164. 

Law,  Sir  Edward,  cited,  104-505. 

Leake,  W.  M.,  mentioned,  76. 

Legal  tender,  gold  coins,  in  India,  4-6; 
legal  tender  provisions  of  Philippine 
Coinage  Act,  315;  removal  of  legal 
tender  quality  from  local  currency  in 
Philippines  has  little  influence  on  its 
circulation,  330;  legal  tender  quality 
given  Mexican,  British,  and  certain 
other  dollars  in  Straits  Settlements  in 
1867,  391-392,  removed,  406. 

Le  Roy,  James  A.,  cited,  252,  254-255. 

Limantour,  Jose",  Finance  Minister  of 
Mexico,  cited,  488-489,  493,  522,  541. 

Lindsay,  A.  M.,  publications  of,  on 
Indian  currency  reform,  79-80 ;  formu- 
lates plan  of  a  gold  standard  without 
a  gold  currency  for  India,  80-88; 
objections  raised  to  Lindsay  plan  and 
Lindsay's  replies,  89-92;  Lindsay, 
cited,  513.  See  also  Gold-exchange 
Standard. 

Local  currency,  proposal  to  use  for  fiscal 
operations  of  Military  Government  in 
Philippines,  259;  difficulties  in  so 
using,  259-263 ;  used  in  Philippines  by 
most  departments  of  Military  Gov- 


ernment, 265;  difficulties  experienced 
in  Philippines  in  withdrawing  from 
circulation,  324-346;  "2  to  i"  rate 
advocated  for  redemption  of,  325  ; 
amount  of,  in  circulation,  estimate  of, 
325;  heavy  exportation  of,  in  1903, 
327;  drives  new  gold  standard  cur- 
rency out  of  circulation  almost  as 
rapidly  as  latter  is  introduced,  327-332. 

Lodge,  Henry  Cabot,  cited,  309. 

Lubbock,  Sir  John,  plan  of,  for  reopening 
Indian  mints  to  free  coinage  of  silver, 
76. 

MacDonell,  Sir  A.  P.,  mentioned,  53. 

Macedo,  Pablo,  mentioned,  497. 

McKinley,  President,  issues  order  Jan.  i, 
1809,  giving  Porto  Rican  peso  an 
official  rating  of  60  cents  United  States 
currency,  174,  178. 

Manchester  manufacturers,  attitude  of, 
toward  certain  proposed  taxes  in 
India,  31. 

Manila  ordinance  requires  merchants  to 
post  rate-cards  showing  terms  on  which 
they  receive  different  currencies,  329- 
330. 

Manila  Times,  cited,  255-256. 

Mansfield  Commission,  mentioned,  7. 

Masayoshi,  Matsukata,  cited,  26. 

Mexican  and  British  dollars,  shipped  in 
large  quantities  to  Straits  in  anticipa- 
tion of  currency  reform,  404 ;  importa- 
tion of,  prohibited,  405 ;  demonetized, 
405-406. 

Mexican  Commission  on  International 
Exchange,  cited,  488. 

Mexican  currency,  1867  to  1903,  472-473. 

Mexican  dollar.    See  Mexican  peso. 

Mexican  Monetary  Commission,  ap- 
pointed, 497;  organization  of,  and 
apportionment  of  work  of,  497-499; 
conclusions  of  4th  subcommission  of, 
500-502 ;  work  of  sth  subcommission 
of,  502-518;  adopts  recommendations 
of  sth  subcommission  and  is  dissolved, 
518. 

Mexican  peso,  made  legally  current  in 
Porto  Rico  hi  1879,  156;  drives  out 
Spanish  coins,  156;  importation  of, 
into  Porto  Rico,  prohibited  hi  1886, 
157 ;  monthly  fluctuations  in  exchange 
and  bullion  value  of,  in  Porto  Rico, 
1800-1895,  157-158;  smuggled  into 


56° 


INDEX 


Porto  Rico,  158-150;  importation  of, 
into  Philippines,  conditionally  author- 
ized, 268;  heavy  importations  of,  by 
Philippine  banks,  269;  value  of,  in- 
creased by  Boxer  uprising  in  China, 
268-269;  appreciates  in  Philippines 
above  $0.50  in  its  gold  value,  270; 
some  facts  in  history  of,  467-469; 
new  Mexican  peso  with  new  fractional 
coins  recommended  for  circulation  in 
Mexico,  503-505,  recommendation 
for,  rejected  by  Government,  521-523; 
exchange  and  bullion  values  of  peso  in 
Mexico,  monthly,  1901-1909,  charted, 
535- 

Mexican  silver  money,  used  in  Philip- 
pines early  in  igth  century,  246; 
importation  of,  into  Philippines,  pro- 
hibited in  1877;  smuggling  of,  into 
Philippines,  248. 

Mexico,  a  large  producer  of  silver,  467 ; 
famous  for  silver  dollar,  468-469; 
economic  conditions  in,  preceding 
currency  reform  of  1903-1908,  471- 
494. 

Military  government  of  U.  S.,  currency 
regulations  of,  in  Porto  Rico,  171-177 ; 
currency  problem  under,  in  Philip- 
pines, 254-277;  authorizes  Manila 
banks  to  redeem  U.  S.  currency  at 
"2  to  i"  on  its  account,  272-275. 

Mill,  John  Stuart,  cited,  on  relation  of 
money  supply  to  price  level,  61-62. 

Mining  industry  in  Mexico,  measures 
to  alleviate  hardships  to,  caused  by 
currency  reform,  530. 

Mitchell,  W.  C.,  cited,  64. 

Mohur,  gold,  circulation  of,  in  India  in 
1835,  6. 

Molesworth,  Guilford  L.,  cited,  46. 

Money,  of  Straits  Settlements,  "cor- 
nered "  by  a  representative  of  a  foreign 
bank,  412-415. 

Monopoly  value,  principle  of,  as  applied 
to  currency,  exemplified  in  India,  38- 
66;  in  Porto  Rico,  157-167 ;  in  Philip- 
pines, 251-253. 

Mortgages  on  country  and  city  property 
in  Porto  Rico,  number  of,  and  rates  of 
interest  on,  1880-1898,  189. 

Nasse,  E.,  cited,  491,  497. 
National  bank  notes  of  U.  S.,  discrimina- 
tion against,  in  Porto  Rico,  176-177. 


National  Bank  of  Mexico,  cited,  549. 

Nicholson,  J.  Shields,  cited,  140. 

Note  Guarantee  Fund  in  Straits  Settle- 
ments becomes  basis  of  gold-exchange 
standard,  453~458. 

O'Conor's  index  numbers  for  retail  prices 
of  food  grains  in  India,  1893-1898, 
60-61. 

Paper  currency,  in  India  prior  to  1892, 
8-10 ;  great  increase  in  circulation  of, 
in  India,  since  1908,  136.  See  also 
Paper  Currency  Reserve,  and  Currency 
Notes. 

Paper  currency  reserve,  for  India,  largely 
held  in  London,  100-104 ;  amount  of, 
for  India,  before  and  after  crisis  of 
1907-1908,  118;  authority  given  in 
1913  to  increase  fiduciary  portion  of, 
to  R  140  millions,  and  to  invest  the 
additional  R  20  millions  in  sterling 
securities,  136-137 ;  further  increase  in 
fiduciary  portion  of,  recommended,  137. 

Paton,  Federico  G.,  cited,  162,  163. 

Paymaster's  department  of  Military  Gov- 
ernment of  Philippines  uses  U.   S. 
currency  exclusively,  264-265. 

Penny,  an  important  coin  in  Porto  Rico, 
213-214. 

Pfs.,  P,  and  $,  use  of  these  symbols,  in 
discussion  of  Philippine  currency 
reform,  262. 

Philippine  banks,  import  Mexican  pesos 
freely  after  August  1898,  269;  fail  to 
comply  with  their  agreement  with 
Government  to  maintain  exchange  at 
not  less  than  Pfs.  2.00  to  $i,  270, 
criticism  of  Philippine  Government 
for  failure  to  enforce  compliance,  271 ; 
agreement  of  banks  to  purchase  on 
government  account  U.  S.  currency  at 
rate  of  2  to  i,  272,  results  of  agreement, 
273- 

Philippine  currency,  problem  of,  in  U.  S 
Congress,  308-313;  provisions  con- 
cerning, hi  Philippine  Civil  Govern- 
ment Act,  300-311;  Philippine  Coin- 
age Act  signed  by  President,  313, 
provisions  of  Act,  314-315 ;  Philippine 
Gold-Standard  Act,  317-319.  See  also 
table  of  contents  for  Part  III. 

Philippine  gold  reserve,  provision  con- 
cerning, in  Coinage  Act,  315. 


INDEX 


561 


Philippine  Gold-Standard  Act,  317-319. 

Philippine  gold-standard  coins  intro- 
duced into  circulation,  316;  become 
basis  for  government  business,  316- 
317- 

Philippine  government  salaries,  put  on 
new  currency  basis,  333. 

Philippine  silver  certificates,  provisions 
of  Coinage  Act  concerning,  315;  sub- 
stitution of  gold  for  silver  as  part  of 
reserve  of,  356-358. 

Philippine  taxes,  fees,  fines,  government 
salaries,  etc.,  put  upon  new  currency 
basis,  333. 

Porter,  Robert  P.,  cited,  156-157,  181, 
182,  186,  194,  195. 

Porto  Rican  bank  notes,  prior  to  Ameri- 
can occupation,  165;  placed  upon 
U.  S.  currency  basis,  205. 

Porto  Rican  currency,  prior  to  1879,  155— 
156;  reform  of,  in  1895,  159—166; 
condition  of,  at  time  of  American  occu- 
pation, 167-169;  question  of  reform- 
ing, in  U.  S.  Congress,  190-202.  See 
also  table  of  contents  of  Part  I. 

Porto  Rican  currency  reform.  See 
analytical  table  of  contents  of 
Book  II. 

Porto  Rican  peso  of  1895,  circulates  at  a 
higher  gold  value  than  Mexican  peso, 
although  of  lighter  weight  and  not  re- 
deemable in  gold,  166-168;  exchange 
value  and  bullion  value  of,  1896-1900, 
charted,  167.  See  also  Porto  Rican 
Currency  and  table  of  contents  of 
Part  I. 

Prices,  in  India,  1893-1899,  58-60; 
1899—1908,  97—99;  how  changes  in 
general  prices  are  related  to  changes 
in  foreign  exchange  rates,  62-66;  in 
Porto  Rico,  how  affected  by  currency 
reform,  212-219;  protests  against 
rising  prices  in  Porto  Rico,  214—217; 
were  price  changes  in  Porto  Rico  per- 
manent, 223-224;  effect  of  Philippine 
currency  reform  upon  prices  in  Philip- 
pines, 345-346;  effect  of  Straits 
Settlements  currency  reform  upon 
prices  in  Straits,  424-426. 

Probyn,  L.  C.,  cited,  35 ;  favors  a  gold 
standard  for  India  without  a  gold 
currency,  77 ;  currency  reform  plan  of, 
78-79;  plan  of,  rejected  by  Fowler 
Committee,  79. 
2O 


Profits,  on  Porto  Rican  recoinage  of 
1895-1896,  164-165;  on  Philippine 
recoinage  of  1906-1907,  365-367; 
on  Straits  recoinage  of  1906-1907,  449. 

Protection  to  home  industries,  in  Mexico, 
claimed  to  be  given  by  decline  in  silver, 
493-494. 

Public  debt.    See  Debt,  Public. 

Quasi  Bimetallism  in  Philippines,  278- 
282. 

Raigosa,  G.,  cited,  516. 

"Raising"  rupee  to  i6d.,  plan  for,  put 
into  operation,  35;  how  plan  for, 
worked,  38-71. 

Ralli,  Stephen  A.,  cited,  26. 

Rate  of  conversion,  for  substituting  U.  S. 
currency  for  Porto  Rican  currency, 
debate  over,  179-191 ;  oo-cent  rate  of, 
adopted  for  Porto  Rico,  191-193; 
was  the  oo-cent  rate  of,  for  Porto  Rico, 
a  wise  one?  225-228;  a  "2  to  i"  rate 
of,  advocated  for  Philippines  but 
rejected  by  Government,  325-327. 

Recoinage,  of  Philippine  coins  minted 
under  Act  of  1903,  359-362  ;  substitu- 
tion of  new  coins  for  old  in  Philippine 
circulation,  362-363;  profits  realized 
on  recoinage,  365-366;  recoinage  of 
Straits  dollar,  447-449. 

Redemption  of  Porto  Rican  currency  in 
U.  S.  currency,  203 ;  amount  and  kinds 
of  Porto  Rican  currency  redeemed, 
204 ;  kinds  and  denominations  of  U.  S. 
currency  paid  out,  205  ;  procedure  of 
paying  out  large  denominations  of 
U.  S.  money  in  exchange  for  Porto 
Rican  money  criticized,  207 ;  inade- 
quate number  of  exchange  offices, 
207-209. 

Reed,  H.  R.,  cited,  8,  118. 

Reed,  M.  F.,  cited,  134. 

Regulator  fund  for  Mexican  currency. 
See  Reserve  Fund. 

Rents  in  Porto  Rico,  how  affected  by 
currency  reform,  219-220. 

Reserve  Fund.    See  Gold  Reserve. 

Retail  prices,  how  affected  by  currency 
reform,  in  Porto  Rico,  213-219;  in 
Philippines,  344-346 ;  in  Straits  Settle- 
ments, 424-426. 

Reverse  council  bills,  sold  during  crisis 
of  1907-1008  in  India,  122. 


562 


INDEX 


Ricardo,  David,  cited  in  defense  of 
Lindsay  plan  for  India,  80-81. 

Romero,  Matias,  cited,  488,  491,  493, 
494. 

Root,  Elihu,  mentioned,  308. 

Rothschild,  Alfred  D.,  cited,  16. 

Royal  Commission  on  Indian  Finance 
and  Currency,  cited,  124,  127,  128, 
129,  130,  131,  132,  134,  135,  136,  137, 
138,  140,  144. 

Rupee,  origin  of,  4 ;  many  varieties  of,  in 
1 8th  century  in  India,  4;  silver  rupee 
of  Indian  Government  made  standard 
unit  of  value  throughout  India,  5; 
given  a  gold  value  of  i6d.,  35-37; 
coinage  of,  in  India,  1899-1908,  100; 
coinage  of,  temporarily  suspended,  in 
November,  1907, 126 ;  rupee  portion  of 
Indian  Gold  Standard  Reserve  trans- 
ferred back  to  Paper  Currency  Re- 
serve, 132-133 ;  a  gold  lo-rupee  piece 
advocated,  144. 

Russell,  H.  B.,  mentioned,  6,  75. 

Rutherford,  H.  K.,  cited,  25. 

Rx.,  meaning  of  symbol,  16. 

Salaries,  of  bank  employees,  how  com- 
muted to  allow  for  depreciation  of 
local  monetary  unit,  262.  See  also 
Government  Finances,  and  Wages. 

Savings  bank  notes  in  Ponce,  P.  R.,  165. 

Secretary  of  State  for  India,  suspends 
sale  of  council  bills  in  1893  with  harm- 
ful results,  39-47;  temporarily  sus- 
pends sale  again  in  crisis  of  1907-1908, 
115—116;  diverts  seigniorage  profits  in 
India  from  Gold  Standard  Reserve 
to  railway  capital  expenditures,  m- 
112. 

Seigniorage  profits,  realized  by  Philippine 
Government  on  recoinage  of  1906— 
1907,  365—367,  by  Straits  Government 
in  recoinage  of  1906-1907,  449;  di- 
verted by  Secretary  of  State  for  India 
from  Gold  Standard  Reserve  to  rail- 
way capital  expenditures,  111-112. 

Seixas,  A.  M.,  mentioned,  186. 

Sherman  Silver  Purchase  Act  of  1890, 
influence  of,  on  Indian  currency  situa- 
^tion,  12,  15-16,  38-39. 

Silver,  decline  in  gold  value  of,  at  time  of 
closing  of  Indian  mints  in  1893,  38; 
decline  in  gold  value  of,  1901-1903, 
376-277 ;  rise  in  gold  value  of,  in  1905- 


1906,  threatens  driving  new  Philip- 
pine coins  to  melting  pot,  349-354; 
requires  government  action  to  protect 
Philippine  coins  from  melting  and  from 
exportation,  355-359;  rise  in  silver 
causes  similar  situation  and  ultimate 
recoinage  in  Straits  Settlements,  445- 
449 ;  decline  in  gold  price  of,  extent  to 
which  stimulates  export  trade  in  Mex- 
ico, 490-493 ;  coefficient  of  correla- 
tion for  gold  value  of  Mexican  peso  and 
Mexico's  export  trade,  491-492  ;  claim 
that  decline  in  price  of  silver  protected 
home  industries  in  Mexico,  493-494; 
rise  in  gold  value  of  silver  in  1905- 
1906  threatens  Mexican  peso  in  Mexico 
with  melting  pot,  535  ;  early  considera- 
tion by  Mexican  authorities  of  such  a 
contingency,  539-542  ;  measures  taken 
to  protect  peso  from  melting  pot,  541- 

547\ 
Silver  industry  in  Mexico,  extent  to  which 

benefited  by  silver  standard,  489. 

Silver  standard,  imposes  heavy  financial 
burdens  upon  Indian  Government,  14- 
17;  return  to,  by  India,  favored  by 
some,  76;  rejected  by  Fowler  Com- 
mittee, 77  ;  established  in  Philippines 
in  1898,  268;  influence  of,  on  Philip- 
pine government  finances,  282-291 ; 
causes  losses  and  uncertainties  in 
Philippine  budget,  283-289;  causes 
accounting  difficulties  in  Philippines, 
289-291 ;  causes  difficulties  in  connec- 
tion with  Philippine  foreign  trade, 
290-298;  silver  standard  with  new 
U.  S.  silver  coins  proposed  for  Philip- 
pines, 300-301 ;  dissatisfaction  with, 
in  Straits  Settlements,  393-394;  re- 
form plan  for,  suggested  by  Singapore 
Chamber  of  Commerce  in  1897,  394- 
396;  alleged  advantages  of  silver 
standard  in  Mexico,  488-494;  aban- 
donment of,  in  Mexico,  recommended 
by  Mexican  Monetary  Commission, 
5°3>  5!8.  See  also  table  of  contents. 

Singapore  Chamber  of  Commerce,  rec- 
ommends plan  of  currency  reform  for 
Straits  Settlements  in  1897,  394;  plan 
is  rejected,  395-396;  writes  Colonial 
Secretary  in  1902  favoring  fixity  of 
exchange,  396. 

Sixteen  pence  rate  for  rupee  a  representa- 
tive one  in  1891-1893,  36;  assimilates 


INDEX 


563 


Indian  currency  conveniently  to  that 

of  England,  37  ;  difficulty  of  clinching 

in  India  in  1897-1898,  55. 
Sliding  scale  of  customs  duties,  in  Mexico, 

to  meet  revenue  losses  due  to  declines 

in  silver,  476-477. 
Sobral,   Enriquez  Martinez,   cited,   529, 

53i,  547- 

Soler,  Carlos  M.,  subgovernor  of  Spanish 
Bank  of  Porto  Rico,  cited,  168,  170, 
186-187,  196,  197. 

Sovereign,  British,  agitation  for  circula- 
tion of,  in  India,  7 ;  made  receivable  in 
payment  of  government  dues  in  India, 
7;  together  with  half-sovereign  made 
receivable  in  payment  of  government 
dues  in  India  at  rate  of  i6d.  to  the 
rupee,  35;  circulation  of,  in  India, 
encouraged,  7,  143-144;  coinage  of, 
at  Bombay  mint,  contemplated,  110- 
1 1 1 ;  attitude  of  Royal  Commission 
on  circulation  of,  in  India,  144—145. 

Spanish- American  War  demoralizes  Porto 
Rican  exchange,  160-170. 

Spanish  copper  coins,  sent  to  Porto  Rico 
in  1895  and  later  punched  to  prevent 
exportation,  164. 

Special  treasury  agent,  quoted  concern- 
ing work  of  exchanging  U.  S.  currency 
for  Porto  Rican  currency,  203,  206- 
207. 

Speculation  in  exchange,  excessive  in 
Straits  Settlements  during  period  of 
"raising"  dollar,  410-416. 

State  Bank  for  India,  proposals  for,  dis- 
cussed by  J.  M.  Keynes,  124. 

Straits  Settlements  Currency  Committee, 
appointed,  396 ;  hearings  and  evidence 
taken  by,  397 ;  recommendations  of, 
402-404. 

Straits  Settlements  dollar,  given  a  gold 
value  of  2%d.,  409.  See  also  table  of 
contents  of  Part  IV. 

Straits  Settlements  currency  notes.  See 
Currency  Notes. 

Sumner,  William  Graham,  cited,  468. 

Taft,  W.  H.,  cited,  303-304,  3"- 
Tawney,  James  A.,  cited,  301. 
Taxation  measures  to  drive  local  currency 

out  of  circulation  in  Philippines,  336- 

340 ;  effect  of,  341-344. 
Tin,  prices  of,  how  affected  by  Straits 

Settlements  currency  reform,  430-432. 


Transit  trade  of  Straits  Settlements,  426 ; 
how  affected  by  currency  reform,  426- 
428. 

Twenty-eight  pence  gold  par,  fixed  for 
Straits  Settlements  dollar,  416-417. 

Two  shilling  gold  par,  advisability  of,  for 
Straits  dollar,  440-441 ;  suggestion  of 
plan  that  would  have  been  suitable  for 
attainment  of,  441-444. 

"Two  to  one"  rate  between  U.  S.  cur- 
rency and  local  currency  in  Philip- 
pines, efforts  of  Military  Government 
to  maintain,  267-280;  proposed  as 
rate  for  withdrawing  local  currency 
from  circulation,  325,  rejected,  326-327. 

United  States  currency,  brought  to  Porto 
Rico  by  American  army  and  business 
men,  171 ;  various  value  ratings  of, 
with  Porto  Rican  currency  and  result- 
ing confusion,  171-174;  President 
McKinley  issues  order  making  60  cents 
U.  S.  currency  official  rating  for  Porto 
Rican  peso,  174;  difficulties  in  making 
oo-cent  rate  effective,  175-177;  plan 
to  introduce  U.  S.  currency  system 
into  Porto  Rico,  178;  question  of  an 
equitable  rate  of  conversion,  178-193  ; 
how  transition  to  U.  S.  currency  basis 
should  be  effected,  193-199;  problem 
of  Porto  Rican  currency  reform  in 
U.  S.  Congress,  199-202;  limited  use 
of  U.  S.  currency  in  Porto  Rico  prior 
to  canje,  229-230 ;  procedure  followed 
in  introducing,  into  Porto  Rico,  203- 
207,  criticism  of  procedure,  207-209, 
a  different  procedure  suggested,  228- 
233;  proposal  to  use  U.  S.  currency 
for  fiscal  operations  of  Military  Gov- 
ernment in  Philippines,  256-259,  ex- 
tent  to  which  so  used,  257,  difficulties 
in  using,  258. 

United  States  paper  currency  inter- 
changeable with  Philippine  pesos  at 
government  treasury,  optionally  with 
Government,  322;  discrimination 
against,  in  Philippines,  270 ;  advocated 
by  many  as  the  currency  for  the 
Philippines,  301-302;  arguments  in 
favor  of,  for  Philippines,  302-303; 
arguments  against,  for  Philippines, 
303-306;  United  States  currency 
deposits  by  public  objected  to  by 
Manila  banks,  383-385. 


INDEX 


Viollet,  Eugene,  cited,  491. 

Wages,  how  affected  by  currency  reform, 
in  Porto  Rico,  220-224;  in  Straits 
Settlements,  425,  432. 

Webb,  M.  de  P.,  cited,  131. 

Welty,  Frank  M.,  cited,  237. 

Westland,  Sir  James,  criticizes  Lindsay 
plan,  90-91. 


Weymouth,  T.  G.  J.,  mentioned,  165. 
Whelpley,  J.  D.,  cited,  188. 
Wiener,  Clarence,  cited,  172,  174. 
Wilson,   James,   Indian  index   numbers 

prepared  by,  21. 
Wilson,  Sir  Guy  D.  A.  Fleetwood,  cited, 

140. 
Wolcott  Commission,  cited,  74-75. 


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